Shadow SPACE
Not even a revived oil patch could turn the office market around
Oklahoma City’s office market is haunted by shadow space — energy-related space under lease but not fully used — so not even a run-up in crude oil prices would fix what ails it.
Revived oil and gas companies could just expand into their own literal vacancies, which wouldn’t affect market vacancies.
Then there’s subleased space, which is also off the books — the market rent rolls, anyway — so even deals involving huge swathes of offices could go unheeded by the primary office market.
And, if you’re trying to get a handle on the market, there’s timing: For example — the biggest example, in fact — brandnew, 690,000-square-foot BOK Park Plaza, with some 300,000 square feet still available for lease, opened after the first of the year.
All of which means the rising vacancies in Price Edwards & Co.’s 2017 year-end office market summary are worse than they appear. None of that — not shadow space, or subleased space, or the new BOK space — is reflected in the numbers:
• Overall vacancy, 18 percent, up from 15.1 percent last year.
• Downtown vacancy, 18.1 percent, up from 13.8 percent.
• Northwest submarket vacancy, west of May Avenue, north to Edmond and south to NW 39 Expressway, 19.1 percent, up from 17.2 percent.
“The biggest hits were once again felt in the northwest submarket, which has historically been the area of choice for energy companies,” according to the report, available at www.priceedwards.com.
Northwest
Since the peak oil price in June 2014, the northwest submarket, which includes Quail Springs Office Park, has seen 460,000 square feet of space vacated, accounting for 62 percent of the overall market’s overall net negative absorption, the report said.
“The good news for the northwest submarket,” Price Edwards said, “is that the worst seems behind it as even most sublease opportunities have been fully absorbed into primary vacancy, eliminating the shadow of an additional three to four percentage points of vacancy that was not included in our reports.
“This is still a very popular area of the city and leasing activity appears to be on an uptick, so this submarket
should bounce back in the next couple of years.”
Forecast: “Vacancy rates should begin to shrink as the worst seems behind us in this submarket. Rental rates may fall a bit as landlords compete for tenants and rent concessions will be more prevalent,” Price Edwards said.
Downtown
Downtown, vacancy could hit 23 percent by the end of 2018, the report said, mostly because of changes at two office towers, the new BOK Park Plaza at 499 W Sheridan Ave., and 220,000-squarefoot Bank of Oklahoma Plaza, 201 Robert S. Kerr Ave., built in 1972.
Downtown, Bank of Oklahoma’s relocation and consolidation
leaves about 300,000 square feet open in the new 27-story tower on W Sheridan, and 80,000 square feet left behind and dark at Robert S. Kerr.
Devon Energy Corp. is leasing 250,000 square feet of BOK Park Plaza, perhaps offering it for sublease.
Forecast: “Vacancy rates will rise as BOK Park Plaza hits the market. Average rental rates will rise due to the addition of this higher-rent building” Price Edwards said.
North
In the north submarket, the move also leaves 50,000 square feet open at BOK Commerce Center, 9520 N May Ave.
“It’s kind of a double whammy in that they hit two submarkets with the move, but it’s a great move for them. It’s a great move for the Oklahoma City downtown to have a prestigious tenant go in and kind of kick off that building,” said Craig Tucker, office specialist, Price Edwards senior vice president and managing broker, who compiled the report.
The north submarket was already wheezing, with vacancy at 11 percent at year-end, up from 6.9 percent the year before, but not counting some 180,000 square feet of space offered for sublease and so not on the report. Adding it bumps the north vacancy to 17 percent.
Forecast: “Vacancy rates should remain near current levels. Rental rates
will also be fairly flat,” Price Edwards said.
The oil patch
“Although the price per barrel of oil has risen from a low of $29 in January 2016 to its current level in the low $60s, we do not anticipate a significant effect on the office market as many oil companies have held onto shadow space and have also become much more efficient in their operations, requiring fewer employees than before. Although some new hires are being made, we anticipate the majority of those to be in field operations rather than in the office. And what new white-collar positions arise will mostly settle into the shadow space companies have held onto rather than create significant increased demand for additional space,” Price Edwards said.