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Jax Daily Record Monday, Nov. 29, 202112:10 AM EST

Commercial Development Outlook: Office vacancy rates climb as companies downsize

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Vacancy rates and rents generally are up, industry reports say.

Office space continues adjusting to the effects of COVID-19.

As they have since the pandemic began in March 2020, major employers are thinking about how to bring their workforce back to the office.

That might mean companies are giving up space they lease.

“Sublease opportunities will continue to come on the market for the remainder of the year, coming primarily from corporate users looking to downsize their footprints as they contemplate future hybrid workplace strategies,” says Avison Young in its Q3 Jacksonville Office Insight Report.

Vacancy rates and rents generally are up.

CBRE reports the office recovery continues to lag other property sectors in the third quarter as firms adjust lease sizes and terms, often opting for shorter leases.

CBRE reports CSX downsized by 128,000 square feet at 550 Water St. Downtown following Florida Blue’s downsize of more than 600,000 square feet last year Downtown and in Deerwood Park.

Still, some tenants are moving forward with new leases.

“Among active tenants, medical users led the pack,” says Colliers in its 21Q3 Office report.

“We are seeing interest on the tenant side from several small to mid-size medical groups to expand or open new locations in the suburbs,” it reports.

Some medical tenants are leaving office towers to lease space in shopping centers because of easier accessibility, the nearby amenities and the fact that there has been a lack of availability in speculative medical construction.

Reports note that JEA and Fidelity National Information Services Inc. are the only large tenants set to move into office towers Downtown built for them.

JLL reported in its Office Insight those two buildings represent the first new buildings added to the Central Business District since 2008.

JLL said Fort Wade Building III in Ponte Vedra and Park Place at Nocatee were completed this year, adding about 187,000 square feet of space to the suburban market.

Don’t look for much Class A speculative office construction.

“We estimate that current construction costs for new class-A office space would require rent in the $40 range, which is well above current market,” Colliers wrote.

Colliers reports the average Class A asking lease rate was $22.27 a square foot during the quarter.

While rents generally rose during the pandemic, “those gains have come at the expense of longer free rent periods and more tenant friendly improvement packages,” Colliers said.

Cushman & Wakefield reported in its Office Q3 2021 Marketbeat that the pace of growth in office-using employment remained positive and is on pace to surpass pre-pandemic levels by year-end.

It found that half of all leases were signed in the Butler/Baymeadows suburban areas. 

“The Deerwood submarkets had the largest amount of Class A leasing activity indicating a flight to quality by some tenants during this period of uncertainty,” Cushman & Wakefield said.

JLL said that “despite a few major move-outs, leasing activity Q3 was the highest Jacksonville has seen since the onset of the pandemic at over 300,000 square feet.”

It said two headquarters moves will result from purchases. 

Jacksonville-based automotive group owner Jack Hanania bought the former Stein Mart Inc. headquarters on the Downtown Southbank, while New Jersey-based Dun & Bradstreet bought the Town Center Two building along Gate Parkway.

“Despite the Delta Variant pushing the return to in-person work back, vacancy increases in this market will likely slow in coming quarters,” JLL wrote.

It also said that Jacksonville will benefit from its availability of Class A space for rent, “at a relatively more affordable rate than other Florida markets.”

Average asking rates remained steady, it said.

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