This year, the corporate bosses at Walmart, Amazon, General Motors and other major companies issued return-to-office mandates, putting an end to remote work completely or at least requiring staff to come three days a week.
But other companies have opted to maintain the work-from-home model — therefore lowering the demand for office space and softening the nation’s office market.
As a result, many office building owners are scrambling to fill up remaining vacancies, offering tenant discounts, amenities and more.
“Remote work is a reality for many workers. It became more accepted and more widespread post-pandemic,” says Stuart Norton, associate director of the Alabama Center for Real Estate at the University of Alabama.
Norton points to a quarterly report by the National Association of Realtors showing that in the Birmingham-Hoover metro area in the first quarter of 2024, the vacancy rate for office space was 12.3%, up from 10.9% in the first quarter of 2023.
By Q2 2024, the office vacancy rates in the Birmingham-Hoover area fell to 11.6%, up from 11.3%, in the same period in 2023.
At the same time, the rate of vacancies for retail and industrial buildings during the second quarter of 2024 were 3.8% and 4.3% respectively, up from 3.7% and 3.6% respectively in the second quarter of 2023.
“I would say office has probably been the hardest hit,” Norton says.
Meanwhile, the market rent per square foot in Q2 2024 in the Birmingham-Hoover metro area was $23, with no change from Q2 2023.
In Huntsville, when the COVID-19 pandemic first hit the nation in early 2020, many employees working for large defense contractors and the federal government went home to work remotely, says Randy Thomas, executive vice president with NAI Chase Commercial Real Estate, which manages commercial real estate brokerage services.
Only critical-need staffers, such as those who, for example, handle classified documents, continued working from their offices, Thomas says. And today in 2024, many others are still working from home.
“I think what companies in Huntsville realized was, ‘We got a lot of office space. We functioned for a year, a year-and-a-half, two years, and we continued to do and accomplish the task that we needed without having these people in the office. So, is there a way to cut our overhead?’ And they’ve taken measures to do that,” Thomas says.
“We see a lot of leases that will come to an end, and companies that will renew their lease, but they’re doing what we call downsizing,” Thomas says.
In fact, the Q2 2024 office vacancy rate in Huntsville was 11.2%, up from 8% in Q2 2023, and a market rent of $23 per square foot, up from $22 per square foot in Q2 2023, says a report by the National Association of Realtors.
Nationwide, however, in Q2 2024, the office sector of commercial real estate set a record vacancy rate of 20.1%, up from 19.8% the previous quarter, therefore shattering for the first time in history, the 20% ceiling, according to Moody’s Preliminary Trend report.
“The office sector’s rising vacancy rate highlights the sector’s current struggles, and there’s natural concern over how high the rate will continue to climb,” the Moody’s report said.
The National Association of Realtors Commercial Market Insights report said, however, that the pace of additional office space vacancies had slowed down with the surplus of vacant office space falling from close to 58 million square feet a year ago to 44 million square feet in July 2024.
To make up the difference, office-building owners are granting more concessions, from several months of free rent to larger tenant-improvement allowances, to lure companies into their buildings, according to data by the commercial real estate and investment firm CBRE.
In fact, the CBRE report states that concessions reached record highs this year with the average duration of free rent in top-tier buildings upon lease signing climbing to 10.1 months, up from 6.8 months in 2019. In lower-tier buildings, the average this year is 8.4 months, up from 6.4 in 2019.
Thomas says the high office vacancies now have office building owners competing to get tenants in their buildings. He uses the example of an office building owner seeking to attract a tenant that occupies 20,000 square feet of in a competing landlord’s building.
“They’re seeing tenants downsizing. So, if the landlord across the street can’t downsize that tenant, I’ll offer them 10,000 square feet. I’ll give them an aggressive offer, and I’ll get them into my space, which will help my overall occupancy rates in my development,” Thomas says.
“Fortunately, Huntsville has been doing well, as far as getting additional government programs. And so the volume of that is somewhat less. It is taking place, but it’s somewhat of a lesser degree,” he says.
More companies today are also looking for office spaces that are close to restaurants, gyms and coffee shops, says Leigh Dale Younce, an interim qualifying broker with White-Spunner Realty in Mobile.
“I do think that’s a stronger component of the office market now. People are wanting those amenities to make it more attractive to come down,” says Younce, “like my clients wanting restaurants and retail to be close by so they’re able to entertain. And, when people go out during the day, they don’t have to travel far to have those types of things.”
Other companies want to be closer to the clients they serve, she says.
“One of my clients, for instance, was a business that handles containers, and they serve the port. So, they wanted to be downtown to be able to view the port,” she says.
But overall, Younce says many companies in her city go for the restoration of existing office buildings rather than the construction of new office buildings, she says.
“There hasn’t been a lot of new office development. It’s more renovation, at least for downtown Mobile. Part of that is due to the fact there are plenty of offices to be remodeled, and RSA (Retirement Systems of Alabama) has done a great job of remodeling a lot and creating some class A office space, as have others,” Younce says.
Meanwhile, Younce says the offices market in the Mobile area is holding steady despite the number of remote workers.
The National Association of Realtors report states in Q2 of 2024, the vacancy rate in Mobile metro area was just 4.8%, down from 5.7% in Q2 2023 with the market rent remaining unchanged at $17 per square foot in Q2 2023 and 2024.
“I just had a tenant sign a lease in the RSA Trustmark Tower. We didn’t have a lot of options for what he was looking for, because it’s highly occupied,” she says.
She says, in fact, that there is a lot of demand for office space in the RSA building in Mobile. But there is not as much available office space on the Eastern Shore off Mobile Bay.
Meanwhile, “The drama continues to unfold,” Norton says referring to the continuing role that remote and hybrid work will have on the office market.
Gail Allyn Short is a Birmingham-based freelance contributor to Business Alabama.
This article appears in the November 2024 issue of Business Alabama.
