Storm Clouds Gathering Over Sun Belt Office Markets As Pace Of Migration Slows

The shine from the Sun Belt office market is beginning to look less bright. 

Sun Belt cities have seen a drop-off from pandemic-era highs of office leasing activity and migration as they succumb to the same macroeconomic pressures impacting the rest of the country. Some places where developers rushed to build offices speculatively are now reckoning with a wave of new inventory coming online as demand has fallen.

"Developers are completing projects in those markets just as the market has slowed, especially from companies involved in the technology sector," said Michael Soto, the research director for Savills in Southern California. 

Leasing activity in the trailing four quarters ending June 2023 was down 13% across 11 Sun Belt cities tracked in Savills’ State of the U.S. Office Market report, according to a Bisnow analysis. Markets that saw some of the most activity since the start of the pandemic have now seen the largest declines. 

Popular Sun Belt destinations have also seen the pace of migration slow. Austin, Texas; Nashville, Tennessee; Phoenix; Las Vegas; Miami; and Atlanta all saw declines in worker migration in the year ending in February compared to the year before, according to a CBRE analysis.

Austin is a prime example of the challenges facing some Sun Belt locations. Office leasing volume was down 48.7% in the year ending June 2023 compared to the year before, the largest decline of any market tracked by Savills. 

“Austin was one of the most enviable office markets in the country pre-pandemic in terms of what was going on down there,” Soto said. “Things have really slowed.”

Texas' capital has 27.2% of its office space available for lease, around 3% higher than the national average, and it leads the country in new construction. Offices under construction would increase the city's inventory by 6.7% after seeing office space increase by 4.3% in the year ending in June.

While the pullback has been starkest in Austin, other Sun Belt markets have fared only slightly better. South Florida office leasing receded by 33.6% in the trailing 12 months ending in June compared to the year prior, and Tampa, Florida, saw a 25.8% drop in activity.

In Atlanta, leasing was down 24% and availability is now at an all-time high. Of the 2.5M SF of office space under construction, only 11% was pre-leased as of last month, according to Avison Young data previously reported by Bisnow.

Tech-centric markets like Austin and Atlanta might struggle to fill office space in the near term as tech firms pull back from signing new leases, Soto said.

Houston was the only Sun Belt market to see accelerated growth in the first half of 2023, with year-over-year leasing activity jumping 46.6% through the second quarter. While the market is a hub for energy and oil companies, Soto said the momentum was being driven by an increasingly mixed tenant base — law firms, financial firms, healthcare companies and professional services providers have continued to ink new deals and open new locations at higher rates than tech companies.

“Those markets that are a little bit more diverse in their regional economy, you probably see that oversupply [of office space] coming down over the next couple of years,” he said. “There are some markets that are a little less economically diverse, so they might see some of that oversupply last for a few years.”

Economic uncertainty is driving part of the slowdown across the Sun Belt and the rest of the country. Tenants are more likely to renew or extend a lease than they were a year ago, according to Savills data, and the ongoing battle to get workers back into the office has led some companies to delay decisions related to total space or location.  

The rising cost of living across the Sun Belt is also putting the brakes on some relocation plans. Markets that attracted a wave of new arrivals earlier in the pandemic have seen rents and home prices soar, upsetting the calculus for people leaving places like New York for less expensive metros where lower costs had been a driver of migration.

"They're not willing to give up 3% mortgage rates when the market rate today is 7%," said Chris Porter, the chief demographer at John Burns Research and Consulting, which tracks migration trends and their impact on housing markets.  "We're seeing slower rates of migration in real time simply because more people have moved in recent years and are adjusted to the cost of living."

Eight of the 10 markets with the fastest-growing rents over the last three years are in the Sun Belt, according to a report from Apartment List. Miami tops the list with a 41% increase in rents, followed by Tucson, Arizona, at 40% and Tampa at 38%. In North Carolina, Raleigh and Charlotte saw rents jump 30% and 29%, respectively, over the same period. 

In Miami, the rising cost of living has forced some residents out of the area. Miami-Dade County’s population declined by 79,535 people between 2019 and 2022, according to The Wall Street Journal, the first multiyear period of population loss since 1970. 

Workers later in their career are especially sensitive to the increased costs of buying or renting a home, said Chris Volney, the managing director of client strategy in CBRE’s labor analytics group.

As costs rise in the most popular metro areas, older workers are more likely to relocate to secondary or tertiary markets like Jacksonville, Florida, where a slower pace of migration has kept prices from jumping at the rates seen in locations like Miami or Tampa.

“If you have 15 years of experience, you're probably kind of set in your job and you're less concerned about switching jobs every year and finding a new opportunity,” Volney said. “Your focus is more on housing affordability, getting a bigger house, good schools for the kids. Those lifestyle considerations come more into play.”

Overall migration to Sun Belt markets during the height of the pandemic reflected a temporary acceleration of a longstanding movement to those markets that has since returned to a pace more in line with the era before lockdowns, analysts said. 

While Sun Belt cities continue to grow, they still have smaller talent pools and fewer college graduates than their more established peers in the North, which keeps those markets attractive options even after some talent chose to leave for warmer climates in recent years.

Austin’s population of workers grew by 4.1% in the three years ending in February, the fastest rate of any U.S. city, but it would take 80 years for the city’s talent pool to reach the same size as San Francisco's, the CBRE report says.  

"If you're one of our clients who are looking for deep pools of talent, it's not like Austin is now much bigger than San Francisco overnight," Volney said. "These things just take a really long time to fundamentally shift the market."