Southeast Office Market Comes Back to Life

It is little secret that commercial real estate in the Sunbelt states have weathered the pandemic relatively well. Investors are lining up to buy properties in the region, across multiple asset classes. So it should come as little surprise that even the beleaguered office category is showing signs of life, according to Allen Aldridge, senior vice president and co-director of asset management at KBS. GlobeSt.com caught up with Aldridge to talk about fundamentals in this piece of the CRE market as well as other related issues. 

How has the southeast office market been impacted by the current environment? Are there particular cities that are faring better than others?

While every region of the country has been impacted by COVID-19, the Southeast has shown increasing resilience. At the start of the pandemic, there was a lengthy pause in deal volume as lenders and investors assessed COVID’s impact on the commercial real estate landscape. However, two strong sales during the fourth quarter of 2020 speak to the strength of the capital markets in the area. In Raleigh, The Dillon, an 18-story mixed-used building, sold for $236 million in November; and in Charlotte, The RailYard, a 296,392 square-foot office building, sold for $201 million in December with heavy competition. Pricing among core, well leased properties has remained solid and stable throughout the pandemic.

KBS manages a mix of office, multifamily and industrial properties in the Southeast region, including Carillon, a 24-story trophy office tower in Charlotte that recently underwent several capital improvements including the addition of spec suites, a state-of-the-art fitness center, side lobby and a newly renovated courtyard adjacent to the Grand Bohemian Hotel; and Crossroads Distribution Center, a 496,725 square-foot industrial property.

South Florida continues to be a robust investment market for KBS, and we are continuing to evaluate acquisitions in this market. Pricing on well-located Class A product has consistently remained near pre-pandemic levels, with such properties in high demand, despite COVID-19, because investors understand the long-term value. 

While the leasing environment posed some potential challenges in 2020, the KBS’ Southeastern portfolio achieved rental collections in excess of 95% throughout the pandemic and leasing activity remains healthy across each of our markets. We took advantage of the timing with less tenants in our properties to build spec suites throughout the region, creating unique tenant suites without a committed tenant. These suites are extremely high-quality and designed with today’s live-work-play tenants in mind. 

For example, we built out seven spec suites ranging from 1,400 to 14,000 square feet at Carillion in Charlotte. Similarly, at the McEwen Building, our 175,262 square foot mixed-use asset in Nashville, we built spec space on the entire first floor, consisting of a 21,000 square-foot spec suite and a smaller 3,200 square-foot spec suite. Usually, spec suites are between 1,500 and 2,500 square feet, but our larger spec suites have been very popular with tenants. This proved to be a valuable strategy because tenants in the market have been able to immediately occupy brand new space as opposed to factoring in additional time to build out their own spaces.

Has occupancy began to increase at your properties in the southeast since the vaccines have been distributed?

Occupancy has varied per region and per property; however, with the distribution of the vaccine, we are seeing occupancy rates rise across the Southeast. Naturally, the region benefits from a multitude of business-friendly states that are encouraging a rapid return to work. Additionally, the Southeast doesn’t rely on mass transit for commuting which has negatively impacted many areas of the country that do. In fact, we have seen progressive increases in occupancy rates in this region since the start of the year, particularly in places like Columbia, South Carolina, which has a diversified economy and tenant base. At one such example in this city is KBS’ Main & Gervais asset, a fully leased 186,303-square-foot trophy-quality office tower with the iconic Hall’s Chophouse located on the ground floor level.

Vaccines are certainly aiding tenants and their employees in feeling more comfortable returning to the office. We are already hearing from tenants that by early to mid-summer, they anticipate a significant number of employees returning to the office.

What technology have you implemented at your properties, and what changes have tenants made to their spaces, if any?

At KBS, we pride ourselves on keeping up with the latest technology to benefit tenants. The pandemic has increasingly put an emphasis on health and wellness features that create safe environments to which tenants and their employees want to return. 

In addition to upgrading many of our buildings’ MERV filters, we have installed self-cleaning nano buttons in elevators, implemented a Clorox 360 program to spray and disinfect spaces, as well as a Vital Vioantimicrobial light system to create a cleaner environment, and Data Watch touchless-entry software throughout many of our buildings. 

We have also made Maptician available to all of our tenants. This is a cloud-based software system for helping tenants implement a safe return-to-office strategy. It assists them in mapping out workstations to allow adherence to social distancing mandates, and there is a hoteling feature that will be helpful post-pandemic as well. The fact is, a recent survey found that the majority of people want to work in the office for the collaboration it provides and the amenities available to them, as well as the overall gains in productivity that are fostered by such an environment. Office is not going away, and technology can help bring more people back safely. 

What is your outlook on the southeast for the next few years given the massive in-migration?

We see great promise in the Southeast region. The warmer weather and attractive lifestyle of this region is enticing to many people, and companies are drawn to its business-friendly environment, lower taxes and low regulation. For example, Hewlett-Packard is moving its headquarters to Houston, and Atlanta recently attracted NCR to the area. Google expanded into Midtown Atlanta; and Microsoft signed Atlanta’s largest lease of the third quarter of 2020 at 500,000 square feet and has since picked up a 70-acre campus near the Atlanta BeltLine path. We will likely see more companies relocate to Sunbelt markets as they realize the benefits. 

KBS has a long track record of being actively involved in the Southeast markets. We will continue to watch the Southeast for opportunities to acquire office space that matches our investment criteria, as we have strong confidence in this region’s increasing strength in the years ahead.

Allen Aldridge is senior vice president and co-director of asset management at KBS, a private equity real estate company.