The office industry is in the midst of a complete transformation. Everything from where we work and how we work is being redefined as companies rethink work-life balance in a post-pandemic world. Markets known for leading demand and net absorption of office space, such as San Francisco, Seattle, and Washington D.C., are no longer the ones paving the way.
Up-and-coming markets, including smaller secondary cities, are taking over. While the office industry certainly has a long way to go before it fully recovers from the pandemic, here are three charts that show why office investors should be going all-in on the Sun Belt region of the U.S.
Sun Belt populations are booming
The Sun Belt region of the United States, which includes the often sunnier and warmer states across the Southern region of the country, has been slowly seeing an increase in population over the past few decades. But the movement south was accelerated during the pandemic. Remote work no longer requires people to reside near their workplace, so many have opted to relocate, choosing to move to warmer, sunnier, and more affordable markets in the South.
According to recent data from CoStar Group and the U.S. Census Bureau, the 10 fastest-growing cities by population over the past year are all located in the Sun Belt. While population growth isn't necessarily indicative of office demand, an influx of people usually translates to a higher demand for real estate space, including housing, retail, and office, to name a few.
The Sun Belt is among the fastest-growing labor markets
A lower cost of living and more favorable weather conditions are only a few of the motivating factors for moving south. Job opportunities are another major reason people are choosing to relocate. Aside from San Francisco, the following Sun Belt cities are among the highest growth markets for the labor force, according to a recent report from CBRE Group:
- Orlando, Florida
- Austin, Texas
- Raleigh, North Carolina
- San Antonio, Texas
- Charlotte, North Carolina
- Nashville, Tennessee
- Las Vegas
Many of these markets were already rife with job opportunities even prior to the pandemic. Charlotte is the second-largest banking hub in the United States behind New York City, and Miami is quickly becoming the hottest new tech hub. But a growing number of companies relocating or expanding their headquarters into these markets is only solidifying the Sun Belt as the dominant leader for office space.
Tesla, for example, is relocating its headquarters to Austin, while Apple nears the completion of its billion-dollar campus in the city. Amazon just leased 9,000 square feet in a WeWork building in Miami, and Microsoft is adding space at its campus in the Atlanta metro area.
The Sun Belt makes up 58% of new leasing momentum
According to a recent report by CBRE Group, the Southeast and South Central regions of the United States, AKA the Sun Belt, made up 58% of all office leasing activity in Q3 2021. That's more than half of all activity and a clear indication that the Sun Belt is where office space is seeing forward momentum. A report from Jones, Lang, LaSalle from Q4 2021 showed many Sun Belt markets nearly reaching pre-pandemic leasing activity, while most larger gateway cities lagged behind.
Class A office space that is adapting development to meet the changing office landscape seems to have the highest demand, with tech companies leading leasing momentum. Additionally, smaller secondary markets are also seeing an increase in office demand, with Palm Beach, Florida, leading the highest positive net absorption rate for the country as of Feb. 26, 2022, according to the National Association of Realtors.
The best way to go all-in?
Office real estate investment trusts (REITs) are the easiest way for investors to enter this emerging trend in the office industry. Cousins Properties (CUZ 7.12%) is the largest, most dominant provider of office space in the Sun Belt, owning office buildings in seven key markets across the South. Highwoods Properties (HIW 8.07%) is another, albeit smaller, office REIT that owns office space across the Sun Belt as well.
However, despite clear evidence showing the Sun Belt is leading the way, recovery for the office industry is still a ways off. Investors should be prepared for a volatile 2022, with new deliveries from developments underway further underpinning supply as it relates to demand. Rents will likely remain flat in 2022, and vacancy rates could tick upward before improving in the long term.
So while office space is still a risky play in today's marketplace, these two REITs certainly offer investors the best exposure to the growing Sun Belt market.