Written by Harrison LaHaie and Brady Lang
Brady Lang is a Financial Analyst, focusing on helping the Dunsmoor Fude brokerage team craft tailored strategies for each client based on their underlying financial objectives. He is closely involved with the process of executing the team’s leasing and sales processes and maintains up to date financial models to help the team constantly advise clients how to maximize value. Keep reading to get Brady's take on what's happening in the Columbus office market.
Office has been the biggest question mark in Commercial Real Estate since the pandemic started in March of 2020. Will people return to the office? If so, then how many? Will companies still want to lease large amounts of office space? Thus far, the answers are somewhat ambiguous. It appears hybrid work is here to stay, but the specifics are unclear. Analyst for Office Investment Services at Colliers | Columbus, Brady Lang, breaks down what has been going on in the Columbus Office market in recent months.
The trends of the sector, according to Lang, are roughly similar to that of the nation. He says, “there has been a flight to quality. Class A office space is attracting most of the tenant demand and has had no major issues staying leased. Much of the lower quality, second and third generation product is what’s driving vacancy up. That excess supply has also had some downward pressure on rents.” Lang also noted that the excess supply created by older office space, especially in the core of downtown, will ultimately be repurposed into different uses such as residential apartments, condos, or short-term living space. Columbus is already beginning to see this come to fruition as the PNC Plaza and Continental Center, both high-rise office buildings in the core of downtown, are undergoing major redevelopment projects that will eliminate much of the buildings’ vacant office space. As more unwanted office product continues to come offline, expect the quality, Class A assets to benefit in the form of increased leasing activity and rent growth. The flight to quality has been something happening across office markets all over the United States. With fewer people in the office, it appears companies are opting to upgrade their space, valuing quality over quantity. As recessionary pressures continue, however, it will be important to track tenant migration patterns to see if the flight to quality trend continues or if there is increased demand for economic-friendly office space options.
With regard to sales, the Federal Reserve’s recent rate hikes have been detrimental. CRE sales have seen decreases in volume since the start of the hiking cycle. Lang, who specializes in office investment sales, sees lenders pulling back. “Commercial lending has dramatically slowed. Banks are following the Fed’s lead by keeping rates high and lending less. On top of that, the slowing U.S. economy increases default risk which is making things move even slower. Investors of capital are extremely sensitive to the cost associated with acquiring said capital. Thus, higher rates eat into property values, which causes some disconnect between buyers and sellers. This is obviously going to limit the number of buyers who are active and ultimately slow down the volume of sales being done. It seems like a lot of the players are waiting for the Fed to pivot before reentering the market.” Commercial property values have decreased by 5% this year, indicative of the impact higher rates have had. This slowdown in lending is evidenced by the decelerating sales volume, which was up 150% year-over-year in the second quarter last year and only 17% year-over-year in the second quarter this year.
The Columbus office market is going through a transformation. Quality will come up as the lower quality assets are pushed out of the market. Class A office space is likely the future for not just Columbus, but the country.