Market Trends and COVID Impact
Over the past several years the Columbus Office market has experienced tremendous growth. The vacancy rate decreased each year from 2011 to 2018, while the average lease rate increased consistently at a rate of 3 to 4% per year from just under $18.00 up to $20.00 per square foot. During this time the market was absorbing close to 1,400,000 square feet per year, which closely followed the pace of new construction. Beginning in mid-2018, the Columbus market reached its equilibrium, absorption began slowing down, and the vacancy rate went up slightly as new construction was delivering. Despite this trend continuing throughout 2019 and into 2020, the average lease rate has continued to increase at a rapid pace and is expected to continue for at least the next few years.
For the first time in nearly a decade, Columbus experienced negative net absorption for the 12 months ending in the first quarter of 2020 at negative 200,000 SF. This swing in balance was intensified during the pandemic resulting in almost 1,340,000 SF in negative net absorption in 2020. To further compound matters, the amount of sublease space on the market doubled during the same period to a total of over 1,100,000 SF.
These factors have caused a momentary pause in the rent growth; however, projections show by the end of 2021, net absorption will again be positive and rent growth will resume at an even faster pace than pre-pandemic. This is remarkable considering the market will also deliver almost 850,000 SF in new construction this year.
Sales volume was down slightly in 2020 due to the uncertain leasing market during the pandemic, however the sales that did take place were roughly the same price per square foot and cap rate as the previous year. One major factor supporting these sales figures is the lack of market supply and availability of low interest financing. Furthermore, the projections for the next two years are a compression in cap rates and considerable increase in price per square foot.
Overall, the Columbus market continues to benefit from its drastic population growth, logistical positioning, and emerging tech scene thanks to an influx of venture capital. With another million people predicted to move to the region within the next 10 to 15 years, Columbus will continue to receive national attention as a primary focus for investors and corporations looking for stability and growth potential.
The bigger question mark moving forward is what long-term impact will COVID have on the office market? Most analysts are projecting a 5 to 10% reduction in occupied square footage by the major employers. The emerging ideology is that most employers will bring back the vast majority of their employees to the office, but will offer them the flexibility to work from home, one to two days per week. While some employers may choose to utilize a hoteling method, where employees share desks and therefore could shrink their overall footprint, most are expected to keep private workspaces for each individual employee.
From a financial perspective, most businesses spend between 4 to 8% of their revenue on rent, whereas on average, they spend 35% on salaries. This contradicts the theory that businesses may look to downsize their office footprint to reduce overhead. If that was the case, it would actually be more beneficial to reduce payroll. However, there is nothing to suggest that businesses in Central Ohio are looking to do either. The local economy has no signs of slowing down and companies are continuously competing for the best talent.
Any research article you read on the topic will explain that office space is just as much about the company culture and employee recruitment/retention as it is about productivity and collaboration. Providing private workspaces for each employee both satisfies any health safety concerns and affords the employee the ability to take pride personalizing their own space. Ultimately, office space is viewed by today’s workforce as much of a perk as vacation time and retirement benefits.
In central Ohio specifically, about 27% of employees are working from home full time. This includes the bulk of state employees, and those who work for the companies such as JPMorgan Chase, AEP, Nationwide Insurance, Cardinal Health and many more. The majority of large employers have pledged to bring their employees back starting in the summer of 2021, although that could be adjusted based on the distribution of the vaccine. Nationwide Insurance is one of the only companies that have suggested they may have up to 30% of their workforce work from home permanently.
Big Lots, meanwhile, has plans to put a large block of space in their recently constructed headquarters in New Albany on the market for lease post-pandemic. This may become a growing trend for companies who have unused space in buildings they own and occupy. While, on the surface, this space may compete with traditional multi-tenant buildings, historically space inside of another firm’s headquarters is not likely to attract the everyday tenant who typically desires their own presence and identity.
There’s no doubt, the massive influx of sublease space that is coming online will have a short-term impact on lease rates and absorption, but it will likely be phased out over a cycle of 18 to 24 months. Sublease space is typically offered at 85% of the average market rate and allows users shorter lease terms, but often comes without any tenant improvement allowance. Businesses who target sublease space are typically looking for inexpensive space to solve a short term need and are not from the same prospect pool as those looking to lease Class A new construction.
Small and medium sized businesses have remained the most active throughout the pandemic. Having the ability to make decisions at a local level allows them to avoid some of the constraints as their national counterparts. Many local business owners have the mindset that it is crucial to get their employees back in the office. In many instances, they have already brought employees back if the working environment has allowed them to do so safely, whereas others are offering a hybrid option for the time being. Companies of this size also view times of uncertainty as their opportunity to position themselves for the future and possibly earn more market share.
The general consensus amongst most economists is that Columbus will only continue to surge coming out of the pandemic. Even if there is a slow down on a national basis, all signs show that the local economy should remain insulated to some of these national influences. In addition to being the state capital and home to Ohio State University, Columbus has always been comprised of home grown, entrepreneurial companies who will continue to drive our market forward.