Class A office space downtown is tighter than ever, and lease rates are at an all-time high, according to Price Edwards & Co.
Vacancy shrunk from 9.3 percent to 1.4 percent over the first half of 2014, sending average rents to a record $21.41 per square foot per year, the commercial realty firm reported in its midyear office market summary.
“The market is healthy as ever. A key to that growth is downtown absorption — and it’s not like that was any one event, just the accumulation of every building seeming to do just a little bit better,” said managing broker Craig Tucker, an office specialist.
A possible shadow is creeping toward the central business district, though: some 300,000-400,000 square feet of new space under construction to be anchored by Oklahoma Gas and Electric Co., plus the possibility of two additional office towers on the west side of downtown.
Testing the market
New skyscrapers will test the market with sky-high rent rates — “at least 30 bucks a foot probably,” Tucker said, and “the ones that are being renovated now are going to be in the high 20s.”
It will be a shock to tenants used to paying the going Class A rate of $21.50 per square foot, he said.
“The key is going to be: Will Class A tenants step up to those higher rates? But if you look just at the last year, Class A rates have grown $2 a square foot. So it’s easy to conceive that when all these projects come online in two years, three years, we’re already going to be at 25 to 26 bucks in existing buildings,” Tucker said.
In addition, evolution in the way companies and their employees use office space is changing pricing tolerance and expectations, he said.
“You can actually go to a $30-per-square-foot building and be at less rent than your current deals because you’re going to have cost savings,” Tucker said. “You’re going to be able to plan more efficiently because you’re currently in an old office that you probably designed 15 or 20 years ago, and we just don’t office that way anymore.
“We don’t need as much space. A lot of your employees don’t come to the office anymore and when they do, they’re not there for very long. There’s no reason to give them a 12-by-15 office.”
An example is PwC’s lease in May of 18,876 square feet of space in the South Tower of Leadership Square, 211 N Robinson, in a deal handled by CB Richard Ellis-Oklahoma.
PwC, formerly PricewaterhouseCoopers, designed the space based on feedback from employees. PwC said the flexible layout enhances team collaboration and caters to mobile workers. It includes a “hoteling” section for employees to support unassigned seating.
Tucker said hoteling is common with financial services firms. He said he is working on a transaction for Deloitte downtown that will have “50 people at least” working from a 2,500-square-foot space.
“They’re always out at the clients’. They need a cube when they come into the office, but that’s about it,” he said. “The thing about it is, 20 years ago we didn’t even have cell phones. We didn’t have iPads. We didn’t have laptops. You had to be at the office to do work 20 years ago. You don’t anymore.”
Across the metro area
Taking all classes of space into consideration, downtown vacancy decreased from 28.6 percent to 24.4 percent with an average rent of $17.40 per square foot per year; and vacancy across the metro area fell from 17.5 percent to 16.9 percent with average rent at $17.12 per square foot per year, Tucker said.
Note: Price Edwards & Co.’s midyear summary incorrectly reported that the Dowell Center office building had been reoriented to housing.
Owner Rick Dowell denied that Friday, and said the building at 250 N Robinson will remain an office building.
Statistics in the summary based on removal of the 19-story, 184,426-square-foot building from office rolls are incorrect.