Cousins Properties reported one of its most active periods for office space demand not just since the pandemic, but in the company's history as tenants largely throw remote work policies to the curb and compete over dwindling amounts of premium space.
The Sun Belt-focused landlord signed more than 930,000 square feet of lease deals in the first three months of the year, a quarterly total that Chief Executive Officer Colin Connolly said is one of the highest Cousins has been able to generate since the real estate investment trust's founding in the late 1950s.
The executive pointed to corporate migration, escalating attendance policies and increasing investments companies are making in their physical real estate as the largest demand generators that are propelling the national office market to new levels of growth.
"Most major companies are phasing out remote work, the flight to quality is unrelenting [and] the Sun Belt migration has reaccelerated," Connolly told analysts on the landlord's latest earnings call. And considering that the national development pipeline has fallen to historic lows, all signs point to shifting dynamics in the power balance between landlords and tenants.
"Simply stated, demand is increasing while supply is decreasing," the CEO said. "The net result is an emerging shortage of premier, lifestyle office space and one that will become increasingly acute over the next several years and favor landlords."
The Atlanta-based office owner and developer is among a cohort of other large landlords across the country that say their prioritization of well-located, highly amenitized properties have positioned them on the winning side of what has become an increasingly split office market.
The vacancy rate for high-end office properties is about 8.5%, according to CoStar data, far below the roughly 14% average reported for the rest of the U.S. market. Asking rents for premier space also command a hefty premium of more than 60% over less attractive alternatives, a widening gap that has given many landlords the upper hand as tenants race to lock down space while it's still available.
"The office market is rebalancing," Connolly said. "New construction is virtually nonexistent, and high-quality lifestyle office space is becoming increasingly scarce."
That limited inventory has been enough to offset broader economic volatility, such as the war in Iran and shifting public markets, Connolly said.
'Opportunistic' approach
Average rents across Cousins' portfolio jumped by 18% through the quarter ended March 30 compared to the same period last year, underscoring tenants' willingness to pay top dollar for premium space. And even after closing one of its busiest leasing periods in history, executives said they have another more than 1 million square feet of deals moving through late-stage negotiations.
All told, Cousins' portfolio leased rate jumped to just shy of 92%, a figure Cousins executives are adamant will continue to climb.
The developer's footprint includes more than 21.1 million square feet of rentable office space in markets such as Atlanta; Dallas, Houston, and Austin; Tampa; Charlotte; and Phoenix.
Even more notable is that landlords such as Cousins are becoming picky about what deals they take and under what terms, said Richard Hickson, Cousins' executive vice president of operations.
At one of its Phoenix developments, for example, the REIT is holding off on some negotiations until the project gets closer to completion since the lease economics for deals improve once tenants can better visualize the finished product.
"We are willing to trade some number of months of timing of occupancy in return for meaningfully better net effective rents and outcome for shareholders," Hickson said. "It's a dynamic market where supply is shut down or we're not going to see any new supply added to virtually any of our markets that isn't already leased. And demand is still allowing us to push net effective rents."
Ready to build
As rents materially rise, firms such as Cousins are warming to the idea of jumping back into the development game.
A confluence of factors ranging from accelerating construction costs to lingering uncertainty has meant many developers across the United States have opted to renovate and reposition existing buildings rather than roll the dice on new construction.
Less than 40 million square feet of office space was constructed across the country last year, according to CoStar data, the lowest amount since 2011 and far below the 10-year average of about 70 million square feet.
And with some markets still faced with depressed leasing demand and the ongoing impact of flexible work policies, other firms have postponed or altogether scrapped groundbreaking plans.
Along with other big-name landlords such as BXP, Cousins executives said the improving market dynamics are creating a window for them to begin weighing potential projects as tenant demand continues to build.
"We plan to be opportunistic when it comes to both acquisitions and dispositions as well as other investment opportunities such as development," said Kennedy Hicks, Cousins' chief investment officer and managing director.
Hicks added: "We have the flexibility to invest in a variety of ways and, given the emerging scarcity of available lifestyle office space, we believe that there will be select instances where development is compelling and offers an appropriate return premium to trophy acquisitions."