Offices across the Triangle are sitting empty as the rise of remote work and a rash of tech layoffs push sublease vacancy rates to record highs.
Nearly three years after the pandemic hit, the region’s office sector is still struggling to bounce back, say analysts, with roughly 3.5 million square feet of vacant sublet space currently on the market, according to CBRE Raleigh Research’s fourth quarter market report released Monday.
That’s roughly 5.9% of overall market inventory, surpassing the previous high-water mark of 5.3% witnessed in the aftermath of the dot-com bust and the 9/11 terrorist attacks.
Overall, office vacancy rose to 13.3%, up from 12.7% a year earlier.
“Leasing activity has been anemic in recent months,” Elizabeth Gates, a CBRE senior analyst, told The N&O. “The Triangle’s commercial real estate market is certainly being challenged.”
Driving the surge in sublease offerings is the “seismic shift” to hybrid work, she says. In the wake of the pandemic, many companies have now determined that they can operate effectively with a smaller footprint. Rising inflation and a spate of layoffs by high-profile companies like Google and Lenovo is also adding to the uptick.
“Most companies are downsizing their space as a result of remote/hybrid work policies, layoffs, or a combination of the two,” she said.
British pharma giant GlaxoSmithKline is among the largest sublessors on the market after downsizing from its 500,000-square-foot campus in Research Triangle Park to 70,0000 square feet in downtown Durham last year. IQVIA has also put more than 259,000 square feet of its campus in RTP up for sublease. And just this week, Citrix put its 153,000-square-foot building for sublease on North West Street in downtown Raleigh.
Other large sublessors include IBM, Duke Energy and Duke Health.
CBRE estimates space needed per worker will reach “a new equilibrium” that could reduce demand “by up to 15%” from the pre-pandemic norm.
“The next 12 to 18 months will prove challenging for building owners. Some near-term planned mixed-use projects are likely to be re-programmed to include less office space,” Gates said.
The immediate impact is already being seen in downtown Raleigh. No new office towers broke ground in 2022, the Downtown Raleigh Alliance reported.
On the plus side: Tenants stand to benefit from the “most tenant-favorable conditions” in more than a decade, with spaces available for companies to get up and running quickly, “often at a reduced rental rate,” Gates said.
Some hopeful signs
There are hopeful signs for the office sector’s eventual resurgence, some observers say.
Several high-profile companies like Bandwidth and Citrix are beginning to require employees to come back to the office. As the economy softens, they say, more employers may sense they have leverage and follow suit, driving a pullback in sublease offerings.
The market is also witnessing a “flight to quality,” where newer properties, particularly those in walkable, amenity-rich settings, have attracted the lion’s share of demand.
Case in point: This month, Kane Realty announced five new office tenants are moving into Smoky Hollow, a mixed-use complex that includes a nine-story, 225,000-square-foot Class A office building at 421 N. Harrington St. in downtown Raleigh, which opened in 2021. The companies, including consulting firm Scalene Design and environmental engineering and construction services firm Brown and Caldwell, will occupy space on the third and fourth floors.
Other developers like Chatwell Property Group are pitching office projects like The Grove at 2700 and 2710 Wycliff Road north of Lake Boone Trail. Slated for completion later this year, it will come replete with high-end amenities like indoor pickleball court, Peloton bikes, CrossFit stations, infrared sauna and a massage room.
“The office market, as a whole, is significantly impaired,” said Bonner Gaylord, Kane Realty’s chief operating officer. “But A-plus properties in A-plus locations are continuing to do well. How B and C properties in [lesser] locations are going to do? The jury’s out.”
In the meantime, more than 2.3 million square feet of office space is under construction across the Triangle. That’s down 44% from two years ago.
“Office construction is likely to remain modest over the next 18 months until the interest rate environment stabilizes and excess space begins to be absorbed.,” Gates said. “This lull in development activity will allow time for demand and supply to become more balanced.”
This story was originally published February 06, 2023 7:30 AM.
