The booming Sun Belt office market

Alexander Paul

For years, investors have viewed the office markets of Boston, Chicago, Los Angeles, New York, San Francisco and Washington, D.C., as key investment opportunities – large gateway markets with enough growth potential to produce regular returns. However, during the most recent growth cycle, and particularly since the onset of the COVID-19 pandemic, a new set of markets are capturing investors’ attention and dollars.

The U.S. Sun Belt markets, led by Atlanta, Austin, Dallas, Houston and Phoenix, but also including other southern metro areas, command respect for their high employment growth rates and leasing activity they produce during a difficult time.

According to CBRE’s U.S. Real Estate Market Outlook for 2022, “The relatively resilient Sun Belt markets of Austin, Miami, San Jose and Charlotte will also benefit in 2022 from business immigration and dynamic growth in the technology sector.” However, this comes against the backdrop of an overall office market that still favors tenants, as the recovery continues slowly from the pandemic-precipitated market downturn. CBRE notes that “despite the positive momentum, the national office vacancy rate will reach its highest level since 1993 in 2022 due to the delivery of more than 53 million square feet of new office construction.”

In this context, the fact that “several downtown office markets like Austin and Miami are already recovering vigorously” highlights the strong position of Sun Belt markets. JLL confirmed these findings in his own report assessing market performance in the last quarter of 2021, noting that “Sun Belt markets such as Atlanta, Austin, Charlotte, Dallas, Miami, Nashville, Phoenix and Raleigh led activity, with many of these markets approaching pre-pandemic rental volume, while major gateway cities continued to lag.

Not a pandemic trend

Sun Belt markets are growing rapidly and attracting outsized investor attention is not a pandemic-initiated trend. For years, these markets have outperformed many of their larger northern competitors, based on their labor availability, supported by good weather and a tax-friendly business environment. However, the pandemic has accelerated the performance of these markets at a time when many others have grappled with the sharp decline in demand for office space caused by COVID-19 and hybrid work schedules are gaining strength. . At the height of the pandemic, many office tenants temporarily closed their spaces in large, dense northeast markets, and some of their employees moved further south. Pre-pandemic business relocations that were driven in part by cost savings — like Honeywell’s move from New Jersey to Charlotte and AllianceBernstein’s move from New York to Nashville — were amplified by these tenant decisions. most recent.

In June 2021, Newmark released a study which ranked 22 major US office markets against each other on 39 key performance indicators. The study identified Tampa, Miami and Dallas as overall best positioned for office market performance during the current economic recovery period. The report notes that the migration of talent, combined with a lower cost environment for business, has led to relocations of companies to Sun Belt markets. Newmark also highlighted Nashville, Tampa, Dallas and Phoenix as the top four markets in the report’s aggregate economic measures. Ultimately, the demand for office space is mainly driven by the growth of office-using jobs, especially those in professional service industries.

Data from the Bureau of Labor Statistics through the end of 2021 confirms that the four markets highlighted by Newmark are producing professional services jobs at a healthy pace; they all matched or exceeded the national growth rate for this employment sector last year. In fact, Dallas, with a 10.7% employment increase in its professional services sector in 2021, nearly doubled the national growth rate of 5.6%.

Qualitatively, investors tend to reinforce economic data through their own decision making. The Association of Foreign Investors in Real Estate (AFIRE) annually surveys its members on their target markets to increase investment. These members identified Austin, Dallas and Atlanta as three of their top four target markets for US investment last year. Boston was the only market outside of the Sun Belt to make the top four.

Employee housing issues

One of the downsides to the rapid growth of Sun Belt cities and their office markets is that housing these employees becomes much more expensive. For example, the Case-Shiller Index shows that metro Atlanta’s indexed home prices rose 21.9% in the 12 months ending December 2021. In comparison, its average office rent has increased by 2.9% in 2021, according to Savills. Notably, Miami (with a decline of 190 basis points) and Phoenix (with a decline of 350 basis points) are two of the few US office markets to see a reduction in the vacancy rate in 2021, according to data from Yardi Matrix. By comparison, the US office market saw a vacancy rate increase of 110 basis points last year. Overall, the residential market is outperforming the commercial market; in the office segment, Sun Belt cities outperform most of their competitors.

As investors revise their strategic plans for a post-pandemic environment, they are likely to pay extra attention to how much capital they place in the Sun Belt. While some tenants’ decisions to stay in a hybrid or remote work setting could put downward pressure on overall office space demand, Sun Belt Markets may offer a particularly compelling opportunity for investors to long term in the office market.


Alexander (Sandy) Paul is an expert in commercial real estate research, market analysis and thought leadership. He is a 20-year industry veteran and most recently served as Senior Managing Director of National Research at Newmark.

Jose C. Birney