When it comes to where the nation's office market recovery is taking hold, Sun Belt cities might not be the first that come to mind.
New York City is outperforming all other major U.S. office markets, while San Francisco is at the forefront of the global artificial intelligence boom that has sent tenants scrambling for space in recent months.
However, a quieter, yet robust, rebound is taking place in cities like Dallas, Atlanta and Charlotte, North Carolina, where a flurry of recent corporate relocations is boosting outlooks among major office landlords.
"Corporate migration to the Sun Belt has firmly reaccelerated," Cousins Properties CEO Colin Connolly told investors in the company's third-quarter earnings call. "Our leasing pipeline is robust across all markets and we see a notable pickup in leasing interest from West Coast and New York City-based companies, with financial service and some technology companies particularly active. Demand is growing."
In addition to Cousins, executives of large real estate investment trusts such as Piedmont Realty Trust and Highwoods Properties said their Sun Belt-focused portfolios are best positioned to capture blooming demand among companies looking to plant a flag in the region.
In Charlotte, companies such as cryptocurrency platform Coinbase, Pacific Life Insurance Co., Citigroup and AssetMark have all signed deals to establish new East Coast outposts. In Raleigh, North Carolina, Highwoods is negotiating a big deal with an out-of-state tenant. The landlord is in discussions with other companies looking to relocate to cities such as Atlanta and Tampa, Florida.
"We're seeing it across our footprint," Highwoods CEO Ted Klinck told analysts on the company's recent earnings call. "The in-migration demand is really accelerating."
These cities still have a way to go before they reach pre-pandemic levels of office demand, as the national office vacancy rate remains stuck at a near-record high of more than 14%. That figure, however, appears to have plateaued and, in some markets, is beginning to trend downward, CoStar data shows.
'Materially strengthened'
Highwood's growing optimism for the office market's broader rebound has been bolstered by a steady pickup in leasing, a trend the Raleigh-based firm's executives attributed to its concentration on Sun Belt markets such as Orlando, Florida, and Nashville, Tennessee, in addition to Atlanta and Charlotte.
The firm signed more than 1 million square feet of office leases through the third quarter, marking its eighth consecutive period of building momentum. New deals accounted for about 35%, signaling that tenants are more willing to commit and invest heavily in office space.
Similarly, Cousins and Piedmont — both based in Atlanta — also reported spikes in leasing, rental rates and touring as the market's power dynamics gradually tilt toward landlords' favor.
All three landlords increased their financial outlooks earlier this year.
Piedmont has been able to boost rents across its portfolio by as much as 20%, as more tenants compete for larger blocks of space due to the nation's barren construction pipeline.
"With office vacancy declining for the first time in years, quality space is becoming harder to find, and new developments are becoming more expensive for occupiers," Piedmont CEO Brent Smith said in the company's earnings call. "We believe that the recent investments that we've made in our portfolio ... will continue to set us apart in the office sector."
Across the board
Other large landlords throughout the United States, such as BXP, Kilroy Realty and Vornado Realty Trust, have expressed similar sentiments.
The U.S. office market is now expected to report an occupancy boost of about 10 million square feet over the next year, CoStar analysts predict, a complete turnaround from the 4 million square feet the market was initially expected to lose in occupancy over the same period.
While landlords with office space concentrated in urban markets such as San Francisco or Washington, D.C., are still facing some lingering pandemic-related headwinds, those with properties in what used to be considered secondary cities said they are in a more solid position to capitalize on rebounding office demand.
That demand has increasingly focused on areas that are often cheaper alternatives to coastal markets but still provide access to a solid pool of talent.
"As we look around the Sun Belt, the migration of technology and financial services companies has been largely driven by moving out of high-tax and high regulation states into markets where there is a highly educated workforce and exciting and dynamic markets," Cousins' Connolly said. "That has certainly been the trend, and I don't see that changing."