Office commercial real estate outlook: Demand for space increasing but construction costs a challenge

"Many companies are still analyzing how much office space they will truly need moving forward."

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  • | 12:00 a.m. January 13, 2023
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Jeff Frandsen
Jeff Frandsen
  • Real Estate
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By Jeff Frandsen | Senior Vice President, Newmark Phoenix Realty Group 

Over the past 12 months we have seen a healthy increase in demand for office leasing in Jacksonville as negative absorption was the lowest it has been in five years.

Most of this demand has been in the range of 10,000 square feet and below (with some notable outliers well above this size). 

Among these smaller users, we are finding that many are looking for space to occupy quickly and for shorter periods of time (24-36 months). It’s likely this need for shorter-term leases is due to the ongoing impact COVID has had on remote work coupled with the looming fear of a recession. 

It seems many companies are still analyzing how much office space they will truly need moving forward. 

While we have seen some larger tenants downsizing, we have also seen sublease space on the market decrease by roughly 18% and some tenants even growing their footprint (Treace Medical, Lennar, Duos Technologies), which is a good sign of the importance still being placed on having a physical office for employees.

Along with this increased demand for office space, we have also seen construction costs for tenant improvement work increase roughly 20% in the last 12 months. This has made it more difficult for landlords to compete for tenancy in the market as these high construction costs are not accompanied by rental rate increases, which have only increased roughly 1% over the last 12 months.

Landlords are having to become more creative to compete, offering more concessions, moving allowances, speculative building space and/or adding new amenities to their buildings.

The increased demand from existing tenants in the market as well as new-to-market tenants will likely continue this year as Jacksonville continues to grow its population by remaining a resilient, low-cost alternative for businesses. 

Until these high construction costs, accompanied by long lead times for permitting, which are at least eight to 10 weeks in some instances, begin to subside, it seems appropriate to assume we will continue to see landlords with second-generation space near “move-in ready” take a top position as tenants look for shorter-term leases with more flexibility.

Jeff Frandsen is the NAIOP Commercial Real estate Development Association Northeast Florida Chapter Developing Leaders Chair. 



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