February 24th, 2023
Each year, our industry experts evaluate and review the Raleigh, Durham, and greater Triangle commercial real estate market’s annual performance. We share activity and trends from the market data we analyzed and experienced in 2022 to activities we anticipate in 2023.
In this segment, we interviewed Ryan Gaylord, CCIM, SIOR, Executive Vice President of Corporate Services Division to share his thoughts on office trends.
To learn more about other property types click on land, life science, investment sales, retail, healthcare, flex, and warehouse.
Companies and executives are still trying to figure out employees’ preferences. So, lots of them are reluctant to sign on for longer term leases. Engineers and law firms tend to be the exception to that rule. Class B and C properties have suffered more than true class A properties in our market. My expectation is that that trend will continue through 2023. Some of the B and C properties could trade hands and those new investors/buyers will pump money into them to create more in-building amenities and other upgrades which can help them compete with newer product. In a growth market such as ours, and one with healthy demand, I think there is an opportunity for investors to scoop up some of this non-core (B and C) type properties at a bit of a discount and have an opportunity to add value.
While just about every other sector in real estate (i.e., flex, warehouse, land, apartments, retail) were on fire in the Triangle, office was still very spotty. Overall tenant demand continued to increase as the year went on, and deal size started to get a little larger, but plenty of companies are still battling with how their employees are ultimately going to want to work over the next 5-10 years. It’s still a challenging hiring landscape. So, despite most companies wanting to mandate their employees to come back to the office due to the value of increased collaboration, improved productivity and communication, etc. that comes from “in-office” work, most firms don’t want to come out and say it as it might lead to some departures.
The biggest winners were the tenants that capitalized on the opportunity to transition into the newest office towers. A lot of the towers that sat vacant since the start of the pandemic started increasing the concession packages (i.e., free rent and tenant improvements) offered to tenants in order to entice tenants to make the jump to the new office digs. That said, I would argue that the landlords were also winners in that through these efforts they successfully leased up the majority of the remaining spaces in some of these towers that have sat vacant for the past few years, albeit it took a lot longer than they had hoped to accomplish that.
Tech continues to embrace a remote and hybrid work environment. Engineering firms, law firms, and some other professional services companies are the ones that tend to have the highest percentage of workforce back in the office. As such, engineering firms and law firms make up the bulk of the deals that are getting signed in the new office towers that are under construction or have recently delivered.
I expect the trend of flight-to-quality to continue with tenants seeking buildings that have desirable building amenities. Some of these “step-ups” in quality of space and building come with a right-sizing component to it where a company can consolidate into nicer digs and rationalize the move by creating efficiencies in a well laid out new space. I also expect the trend of subleasing of space, or at least evaluating that as an option will continue, particularly in the tech industry.
There are still some pretty favorable tenant deals to be had in the market. I have seen some of the largest TI packages in the past few decades offered to tenants within the past 12-24 months in order to help entice tenants to move forward with relocations, largely to help offset the high cost of construction.
The uncertainty in the office leasing world presents an opportunity for tenants to capitalize on those conditions and explore opportunities to trim overhead, right size space needs, and upgrade building or space in an effort to entice its workforce back into the office.
A big challenge for our market is absorbing some of the very large sublease space that is currently out on the market. There are a few very large tenants with big blocks of space on the market for sublease that skew our overall sublease numbers (i.e., GSK, LabCorp, Duke Energy, IQVIA, Duke, Citrix, & RHO – make up 1.6 million square feet combined). That is pretty significant when you put that into perspective compared to the 3.9 million square feet of total sublease space we have in our market.
There are lots of companies still trying to figure out how their staff will work given the evolution of employees’ preferences over the past 3 years. I expect that will continue. Hybrid work will also be a trend that is here to stay, but I would guess the percentage of those in person to at home could shift over time to more people back in the office. That said, I am not naïve enough to think that we will ever get back to each and every person commuting into work every day.
Every company is different, and each has a unique challenge to solve. I enjoy getting to work with such a diverse group of people in helping them accomplish their corporate real estate goals and objectives.
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