Vacancy signs: Oklahoma City dodges the worst perils of 2020, so far

The first half of the year could have been worse for the battered Oklahoma City office market, and the second half surely will be.

That's the gist of Price Edwards & Co.'s midyear office market summary, which shows a general increase in vacancy across all sectors of the city and all building classes, and a slight dip in rental rates.

This year "will go down as one of the most challenging years of all time for the local office market and we are only halfway home," according to the report by Craig Tucker, managing broker and an office specialist at the brokerage and commercial property management firm.

Trouble started, again, in the oil patch, not with the coronavirus pandemic, although the firm said the outbreak and related business shutdowns, rocketing unemployment — and perhaps a fundamental shift in the idea of commercial office space as workplace — could do longer-lasting damage.

The local economy, especially the energy sector, was already slowing at the first of the year. Oil companies, producing more oil more efficiently than ever, required fewer rigs and crews in the field and fewer people in offices in town. Then in March the Russia-OPEC price war sent crude oil prices crashing, plunging to the bottom of the barrel in April.

In May, CoStar Group, a commercial property data firm based in Washington, D.C., said it all left Oklahoma City more exposed than bigger, energy-oriented Dallas, Houston, and Denver.

"Simultaneously, the entire planet was faced with an international pandemic that dropped the stock market by more than 30%," Price Edwards said.

The numbers

Vacancy overall rose from 20.9% at the start of 2020 to 23.5% at midyear, the firm reported.

Downtown, vacancy grew from 21.8% to 23.6%, and suburban vacancy rose from 20.8% to 23.4%, according to the report.

With more space coming available on the market — an additional 536,000 square feet citywide, including 146,000 square feet in the central business district, and a whopping 390,000 square feet in the suburbs — average market wide rental rates dipped from $19.53 to $19.45 per square foot per year.

Tucker said it had been five years since the market saw an across-the-board decline: the end of the fracking oil boom in 2015.

Timely transactions

"The market is not nearly as damaged as it could have been," Tucker said in the report, because of several significant deals that kept more empty space from pouring on.

In suburban northwest Oklahoma City, Costco bought the vacant 234,000-square-foot former Hertz Corp. building at 14501 Quail Springs Parkway in late May.

Next door, EOG Resources bought the nearly vacant 110,000-square-foot former Linn Energy building at 14701 Quail Springs Parkway, moving from 55,000 square feet of leased space in the IBC Center, 3817 Northwest Expressway.

Downtown, Heartland Payment Systems outgrew its brand-new 100,000-square-foot headquarters at 606 N Broadway Ave. before it even took occupancy, and leased an additional 40,000 square feet of space in the Mideke Building at 100 E Main St.

Also downtown, Tapstone Energy downsized and moved from the Mideke Building to a 25,000-square-foot space in Leadership Square, 211 N Robinson.

Year-end outlook

Looking to the end of 2020, the state Commissioners of the Land Office will have a positive effect on the market, and bankrupt Chesapeake Energy Corp. is likely to have a negative, possibly drastic, impact, Price Edwards said.

The Land Office is expected to close on its purchase of struggling SandRidge Energy's mostly vacant 493,000-square-foot tower at 123 Robert S Kerr Ave. and fill it with state government agencies.

Chesapeake Energy, which filed for Chapter 11 bankruptcy in late June, is expected to be restructured "likely with a significantly reduced office footprint," Price Edwards said. Chesapeake has an estimated 1.25 million square feet of space in 15 buildings around its headquarters at 6100 N Western Ave., but perhaps only 25%-30% of its peak campus employment.

"How Chesapeake handles the marketing of excess space could could have a dramatic impact on the market, particularly the the north and northwest submarkets," Price Edwards said. "They have been trying to lease a 125,000-square-foot building on the campus for nearly nearly two years with no success so far. Presumably, the company will become more aggressive in its efforts to pare its real estate holdings, but no announcements have been made in that regard.

"Regardless, that potential inventory of space weighs heavily on the market."

Further ahead

As for the work-from-home response to the coronavirus, however it evolves, the firm said, it will be critical for the demand for commercial office space everywhere.

"We know it’s not positive, we just don't know how negative it is yet," Price Edwards said. "Most tenants we are working with are maintaining their current footprint for now, but many could reduce their square footage requirement as the virus persists and work environments evolve.

"Oklahoma City could possibly mitigate some of the damage through its position as a lower-cost alternative with a high quality of life as many large corporations look to leave larger cities and dependency on public transportation."