“Class C” office buildings in downtown Oklahoma could reach an all-time high vacancy of 65 percent by the end of the year, according to Price Edwards & Co. — not a surprise, necessarily, but a milestone, nonetheless.
It's not as clearly a negative marker as it might seem, except for the property owners. A “flight to quality” has tenants at all levels moving up, said Craig Tucker, Price Edwards managing broker and office specialist.
“The best space is getting leased up. Everybody seems to be stepping up,” said Tucker, who compiled the firm's midyear office market summary.
The most recent big move was announced just this week. Blue Cross and Blue Shield of Oklahoma reported its pending relocation from a building it has long owned at 3401 NW 63 to leased space in the IBC Bank Center, 3817 Northwest Expressway. Blue Cross said its building needs work and at 80,000 square feet is too big for its needs.
It is leasing 49,000 square feet at IBC.
Downtown will take the biggest hit at the end of the year when Devon Energy Corp.'s lease of some 225,000 square feet at First National Center expires, Price Edwards said.
“As we have stated before, many of these buildings are faced with functional obsolescence and it remains to be seen what becomes of them. Given the increase in demand for downtown housing, we expect a few may be converted to that or alternative uses,” the firm reported.
Setting the oldest buildings aside, downtown vacancy is closer to a “reasonably healthy” vacancy of 13.5 percent, Price Edwards said.
But it's the top of quality where the market keeps humming downtown: Class A space keeps getting taken.
Class A vacancy had shrunk to 2.3 percent by midyear, which probably is an all-time low, the firm said, and rents had risen to $19.55 per square foot per year, an all-time high.
Downtown eyes are on land now occupied by Stage Center, where a new skyscraper is reportedly in the works.
“Speculation is rampant regarding the anchor tenant for what is reported to be an at least 20-story tower,” Price Edwards said. “It is likely that the construction of such a building will create offsetting vacancy the anchor tenant leaves behind as we do not believe, and it certainly has not been reported, that the tenant is new to the market.”
Overall, the Oklahoma City office market held steady the first half of 2013, with vacancy inching up to 16.5 percent from 16.2 percent.
A year ago, it was 16.4 percent, according to Price Edwards.
The north submarket was the only one to see “negative absorption” — that is, a net vacating of space — partly because of Chesapeake Energy's retreat from leased space back to its own campus at NW 63 and Western Avenue, the firm said.
The city would have seen new leased office development by now “if not for developers' fears about the future of Chesapeake Energy and the amount of space that would be added to inventory,” Price Edwards said. “As it stands, most of the better quality space that Chesapeake has vacated has been quickly absorbed by the pent-up demand of tenants in need of quality space.”
The firm pointed to the quick backfilling of most of 100,000 square feet of former Chesapeake-leased space at IBC Bank Center within six months of going on the market — and at higher lease rates — and said it expected similar results at Valliance Tower, 1601 Northwest Expressway, where Chesapeake recently vacated 25,000 square feet.
The northwest submarket remains among the healthiest, with Class A vacancy down to 3.7 percent, the firm said, and Class A space is “virtually nonexistent” along the Memorial Road corridor, where eight of nine Class A buildings are fully occupied.