The first half of 2019 showed little change in the Oklahoma City office market, but what change occurred was fairly positive. Vacancies fell from 20.1% to 19.3% and absorption of space totaled 128,000 square feet. Normally, that would be promising data, but the fact that much of the positive absorption occurred in the Midtown and West submarkets, which are the smallest submarkets in the area and where rental rates are typically the lowest in town, does not give cause for great celebration. The Central Business District experienced positive absorption of 60,000 square feet, but that was offset by negative absorption of 44,000 square feet in the North and Northwest submarkets, which by far contain the lion’s share of suburban space.
The Central Business District is currently 20.8% vacant compared to 21.8% vacant at the end of 2018. Average rental rates downtown held steady at $22.26 per square foot. The vacancy rate in the CBD should improve slightly in the next 6 to 12 months as two mostly pre-leased buildings are added to the roll. The Heartland Payment Systems Building and the Monarch Building will both come on-line in that period, and each is at or near full occupancy upon completion of construction.
Once again, both the North and Northwest submarkets, which contain approximately 78% of all suburban space, saw an increase in vacancy and negative space absorption. The North submarket’s vacancy rate increased from 15.0% to 15.3% and the Northwest submarket’s vacancy rate increased from 18.0% to 18.3%. These submarkets’ absorption totals were both in negative territory with -14,000 square feet and -30,000 square feet respectively.
Despite a more diverse economy than at any point in the city’s history, the market remains sluggish. May 2019 Bureau of Labor statistics indicate a citywide unemployment rate of less than 3%. That is terrific news for the city, but it is a concern for the office market going forward. If the Oklahoma City office market can’t perform better than at an 80.7% occupancy rate with unemployment at only 2.9%, when can we expect things to get better? Unless white-collar employers change their way of thinking, office vacancies should remain above historical norms. Many employers are downsizing their footprint at lease renewal by some combination of designing smaller offices, increasing use of shared office areas, or sending some of their employees out of the office to work from home. It stands to reason that the market may be overbuilt for our current employment base, and more specifically how companies now use office space.
It should also be noted that tenants desire newer buildings with modern amenities as reflected in the higher occupancy levels of buildings constructed since 2000. Although that vacancy rate is above 19%, that number falls to just above 12% when the 690,000 SF BOK Park Plaza, which was just completed a year and a half ago, is removed from the calculations. Approximately half of that building is still vacant, but we expect it to continue to fill over the next few years, and at the expense of pre-2000 buildings.
We are certainly not advocating new construction, as the market is still saturated with plenty of available space. Many users are willing to pay up for newer buildings, but few are willing to pay enough to justify the pro forma rents required of new construction. What we do expect to see is the continued addition of amenities offered at existing and older Class A buildings, such as fitness centers, common area improvements and modern conference facilities as existing landlords battle to improve their occupancy rates and compete with newer buildings.