Some real estate stakeholders have for years argued that increased return-to-office demand will mark a turning point for the national market for that property type. One Sun Belt-focused firm says that point has been reached.
Cousins Properties, one of the Sun Belt's largest real estate investment trusts, is boosting its outlook for the remainder of the year as leasing activity, property tours and the demand for physical space is rebuilding some of its pre-pandemic momentum. The Atlanta-based firm inked upward of 400,000 square feet of office deals in the first few months of 2024, almost double the amount it signed for the same time last year and a clear result of tenants more frequently using their spaces.
Following years of depressed demand and tenants' unwillingness to commit to long-term deals, Cousins' CEO Colin Connolly told analysts on the company's earnings call Friday that the REIT's performance through the first quarter of the year was by and large a result of improving office-use rates as well as the firm's focus on Sun Belt markets that have fared far better than some larger cities such as San Francisco or Washington, D.C.
"The return to office continues to accelerate," the CEO said. "Many employers continue to require greater office attendance, and since just last quarter [several] have announced in-office policies of at least five days a week, with more likely to come. As a result, our parking garages are filling up, and demand for our space is increasing."
The company, which reported net income of $13.3 million for the first quarter, also raised its guidance for 2024 "as office utilization in our markets continues to recover," Connolly said. What's more, the company's portfolio of high-quality properties has made it possible for Cousins to consistently bump up rents, marking its 40th consecutive quarter of positive rate increases.
Across the United States, corporate giants such as Apple, Starbucks, Cigna, United Parcel Service, IBM, among others have ramped up efforts to bring employees back to physical office space. The pullback from lenient flexible work policies, which many real estate executives blamed for creating a stagnant leasing environment, is beginning to show signs of a renewed interest in office space — or at least a willingness among tenants to make longer-term commitments.
To be clear, headwinds such as the increased cost of financing and a record amount of available office space is still weighing down the national office market. Yet Connolly said many of those challenges are concentrated in the older, "suburban commodity" buildings that are contributing to the bulk of the country's nearly 14% vacancy rate.
"There is little demand for them" he said of the aging, soon-to-be or already obsolete properties. "Just 30% of office buildings comprise about 90% of the national vacancies, so its highly concentrated within a small subset of buildings."
Cousins' national office portfolio is concentrated in city's that have long outpaced others in office utilization rates. The REIT owns and is developing properties in Atlanta; Austin, Texas; Tampa, Florida; Charlotte, North Carolina; Phoenix; Dallas; and Nashville, Tennessee. Its average leased rate was just shy of 91% by the end of the first quarter, holding steady from year-end figures the company reported in 2022 and 2023.
Along with tenants' strengthened focus on high-quality, new properties, Cousins executives said the lack of new construction will be another boost for the company's portfolio.
"The math for new development just does not work in today's higher cost and higher interest rate environment," he said. "As a result, the overall inventory of office buildings is contracting just as leasing begins to improve. Market forces are rebalancing the office market in real time, and lifestyle office will thrive with improving demand and reduced competition."