Office space landlords are in for a turbulent year. Tenants are looking for cost reductions but with more space. Layouts of office spaces are reversing away from co-working models and working-from-home hybrids are likely to stay for the foreseeable future.
Historically, office space in the Augusta market has always been challenging to lease. For the last decade, though, we have enjoyed a robust economy and job growth in the CSRA. That has led to a the absorption of formerly vacant space as well as rental rate growth.
To remain competitive in the Augusta market, landlords are going to have to lower rates and get creative to retain existing tenants and attract new users.
Office space that ten years ago would rent for $12 to $14 per square foot per year reached levels in the low 20’s per square foot the last two years. It took a long time for the rent growth to get to that level after the crash in the market from 2006-2008. In early 2020, the vacancy on the market had reached an all time low as we had benefited from years of absorption.
The COVID-19 pandemic has changed every aspect of office space for the foreseeable future.
It used to be that office users wanted to have the space divided into small offices for staff to use.
The days of wanting a window or corner office changed somewhere in the last two decades.
Trends switched to a more open office concept with co-working space that was more collaborative. This was a good move for tenants who could fit more employees into smaller footprints. That means that rent costs were lower as well as buildout costs for the space. Less walls and more cubicle work stations were the trend.
MORE: Co-Working Space Doesn’t Work
Now the office space market is seeing a reversal back to wanting spaces divided up. Employers
are looking past 2020 at what the next pandemic crisis will be and how to prepare for it. The easiest way to avoid massive shutdowns with people working from home is to have them socially distance at work. That can’t be done in a bullpen type space. It can be done in a chopped up space where everyone has their own office and door they can close.
The result is that landlords need to lease more space to accommodate social distancing. But with the abuse the economy took in 2020 companies are reluctant to take on additional costs. In fact the trend is that tenants are looking to reduce costs.
Most companies adapted in 2020 to some type of hybrid work from home model. Augusta has been blessed compared to other areas of the country and most companies have been back to work for some time now. Many are implementing a hybrid still for some workers and others have a plan in place to go back to the hybrid model if they have to.
MORE: Subleases Can Solve Tenant Problems
Subleases are starting to make their way into the market as well. Historically, sublease space leases faster than traditional space. A recent survey by CoStar Group, Inc. indicates that almost half of subleases on the market have three years or more remaining which means that absorption for new
space is going to slow.
Companies have found that it is cheaper to shutter the office and work from home or to lease a cheaper office and have a hybrid model. Because rental rates reached over market levels, tenants are looking to sublease to get out of lease costs. Subleases help tenants recover some of the carry
costs of holding the office. This hurts landlords though as it adds more supply to the market at
cheaper than market rates.
It’s all bad news for landlords. Here are six things that will reduce landlords’ office space profits.
- Reducing rent costs is an easy way for tenants to resolve budget deficiencies and recover losses from 2020.
- Tenants want landlords to provide modified floorplans to accommodate social distancing versus open co-working concepts.
- Hybrid work-from-home models are likely to stay for the foreseeable future, reducing tenants footprint sizes.
- Rental rates are inflated from years of robust growth. Tenants are going to renegotiate lease rates on renewal rather than renewing at predetermined renewal option rates.
- As absorption slows, supply increases and demand falls, pushing rental rates lower. This requires landlords to offer more concessions in order to retain existing tenants and attract new ones.
- Sublease increases add more supply to market, driving rates even lower. Landlords in Augusta do have some good news, though: cyber. The cyber growth in the area hasn’t helped too many local landlords yet. The state-funded Georgia Cyber Center has been absorbing most of the cyber users coming to Augusta.
There have been a few that have leased from private landlords. The creation of the two buildings and the plans for a third add more supply into the market, causing less absorption for private landlords.
MORE: Timeline for Building 3 at Georgia Cyber Center Uncertain
The cyber buildings are an anomaly in that there is no office space like it in town and their
rental rates reflect that. Had the state not stepped in and built the Georgia Cyber Center, many
of the users would have not located to Augusta in other landlord-owned spaces. Had that happened, the ancillary companies expected to follow cyber would not be headed towards Augusta.
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The effects of cyber have not been felt yet and it is unclear what the exact impact will be on the
local office space market. Until the full cyber influx happens, Augusta office space landlords will
keep feeling economic pains.
Joe Edge is the real estate columnist and Publisher for The Augusta Press. Reach him at joe.edge@theaugustapress.com
