Q1 2022
Prevailing Theme in the Office Sector: Uncertainty
Two years into the mass remote-working experience, owners of office properties continue to face an existential threat to future demand. Nationwide, physical office occupancy remains challenged at just a quarter to half the level of pre-pandemic occupancy as of March 2022, as compared to two years ago, depending on the specific market. Uncertainty is still the prevailing theme in the office sector, however, after two consecutive quarters of improved leasing activity, it appears the nationwide office market is stabilizing and entering the early stages of recovery. On the national level, leasing activity remains slightly below pre-pandemic standards, although leasing volume in Q3 2021 and Q4 2021 saw growth from the first half of the year. The increase in leasing volume in the second half of the year helped contribute to positive net absorption, with the national office vacancy rate flattening out to just above 12%.

While the uptick in leasing of office space is a positive indicator for the market’s recovery, the sector still faces considerable challenges, one of which is the rise in sublet space. Even though the availability of sublet space has slowly declined in recent quarters, it is still close to a record high. Office users in the market have seen this as an advantage and are seeking more affordable sublet leases for their space needs. The high amount of available sublet space has had an effect on landlords’ bargaining power in lease negotiations and has resulted in relatively flat rent growth on a national level. Office property owners are eager to keep their buildings occupied and are needing to offer aggressive concession packages to attract and retain tenants.

Effective rents remain higher than what the office sector experienced during the Great Recession despite the considerable concessions offered by landlords. Office owners offered more moderate concessions following the Great Recession and asking rents fell more sharply than what the sector is experiencing today. The market is showing signs of stability and landlords may find it tempting to hold out for the prospect of a higher-paying tenant in the future, but it is advisable for office owners to secure the certainty of occupancy now rather than chance fate.

Source: CoStar News
Fort Collins/Loveland/
Larimer County

In the Fort Collins/Loveland market, over the past 12 months, there has been 176,000 square feet of positive absorption, in a submarket of approximately 12,000,000 square feet, which is an 162% increase from Q1 2021. For comparison, Q1 2021 reported a negative absorption of 257,278 square feet. Once the pandemic took hold of the economy, the vacancy rate rose above 7%, which is the highest vacancy rate seen in the area in the past five years. Today, the vacancy sits at 5.89%, down from 6.07 % in Q4 2021; sublet vacancy rests at 1.2%. Presently, there is 708,000 square feet of available space, which includes 253,000 square feet of sublet space. As of Q1 2022, the availability rate is 8.7%, down from 10% in Q2 2021, which was the highest availability rate the submarket has seen in the past nine years. In the last 12 months, there have only been eight tenants leasing greater than 10,000 square feet, with the average lease size being around 2,300 square feet and an average lease term of three years.

Market rents have remained relatively flat since Q1 2021 and market rents are predicted to only increase by $2.00 per square foot over the next five years. Vacancy rates are also predicted to remain flat for the next five years as the future of the office market remains uncertain. Positive net absorption is forecasted for the remainder of 2022 into 2023.

Source: CoStar
Greeley/Weld County

The Greeley/Weld County office market is comprised of 5,800,000 square feet, compared to an inventory of 12,000,000 square feet of office in Fort Collins/Loveland. Over the past 12 months, net absorption was negative 27,500 square feet, up from 227,000 square feet of negative absorption in Q1 2021. The vacancy rate has remained relatively flat since Q1 2021, vacancy now sits at 7.6%, slightly down from Q1 2021, which saw a vacancy rate of 7.86%. The last time the vacancy rate was this high was in Q1 2012. The occupancy rate has declined from 97.7% in Q4 2019, down to 92.4% as of Q1 2022. In a market that has 747,822 square feet of available space, of that is 323,000 square feet of sublet space, bringing the availability rate to 13.7%. Since Q1 2021, there have been 73 lease transactions, of those, only six lease deals were for space over 5,000 square feet; the average lease size was for 2,300 square feet, on par with the Fort Collins/Loveland market.

Over the past 12 months, market rents have grown by a modest 2% and it’s predicted market rent growth will decline over the next five years. It’s anticipated that vacancy rates will remain flat around 7.5% for the next five years, which is a stark contrast to a vacancy rate of 2.3% reported in Q4 2019.

Source: CoStar
The Future of Office Space

Over the past two decades, the design of office space has evolved to allow for more natural light and collaborative work spaces. Once the pandemic overtook the market, interior designers and office furniture suppliers started seeking new ways to accommodate social distancing and adapt to the new hybrid work model of the future. Over 20 million professional employees nationwide will not return to the office, as another 3 million jobs have moved to being permanently remote in the fourth quarter of 2021, according to a remote-work report from Ladders.

Despite the influx of remote work, many employers have pointed to the value of in-person collaboration and the corporate culture offered in an office setting that can’t be replicated through online meetings. The companies that are committed to bringing people back to the office, will continue to offer a hybrid model, while investing in spaces that promote collaboration and engagement. It’s predicted top-tier properties will attract a disproportionate share of demand and will command more favorable lease terms for tenants, with the remainder of the market depressed.

Source: CoStar News, Ladders
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CoStar Market Reports - Larimer and Weld County
Q1 2022
This quarterly publication is authored by Jamie Globelnik