Insights

Demand for Offices in These Cities Is Red Hot

There’s been a significant migration of people to the Sun Belt region over the years. From retirees to remote workers to job-seeking millennials, more people are moving south every day. Its warmer weather, the lower overall cost of living, and fewer government regulations, compared to larger cities in the Northern part of the country, are among the many factors drawing people to the region.
However, the population isn’t the only thing migrating to the Sun Belt region. An increasing number of corporations are relocating and expanding across the area. That’s driving demand for office space in leading Sun Belt markets. This trend is benefiting Cousins Properties (NYSE: CUZ), a real estate investment trust (REIT) focused on owning high-quality office buildings in that part of the country.
Image source: Getty Images.

Strong demand for its Sun Belt properties
Cousins Properties has “been proactively assembling a Sun Belt trophy office portfolio for over a decade,” according to a statement by CEO Colin Connolly in the first-quarter earnings release. That strategy is starting to pay big dividends.
The office REIT noted that it signed 324,000 square feet of leases during the quarter. That included 224,000 square feet of new and expansion leases, representing 69% of the total. This strong demand for space in its buildings drove a 15.4% increase in second-generation net rent per square foot, compared to the prior lease rate.
According to Connolly in the accompanying conference call, the big driver is that “office demand is migrating to the Sun Belt in a significant way.” He pointed out that “the Sun Belt represents only 26% of the national office inventory and yet accounted for 58% of new-to-market leasing in 2021.” That’s primarily due to a hiring spree by the tech industry.
The CEO pointed out that the sector has added 372,000 office jobs nationally since early 2020, leading all other sectors. They’re bringing many of these jobs to Sun Belt cities like Nashville, The Research Triangle, Phoenix, Austin, Tampa, Charlotte, Dallas, and Atlanta, all of which are cities where Cousins owns properties.
Connolly noted that the tech industry is following the talent migration to the Sun Belt. He stated on the call that: 

Select cities in the Sun Belt have meaningfully urbanized over the last decade. These markets now offer an exciting alternative to gateway cities at a much lower cost. Not surprising, employers are following the talent.

Quality matters as much as location
Companies see having high-quality office space as an important tool for recruiting this talent. That’s leading them to prioritize leasing space in higher-quality buildings. Because of that, newer buildings with modern amenities are in much higher demand than older buildings.
Connolly noted on the call that: “Over the past few quarters, buildings built since 2015 accounted for 62 million square feet of national net absorption. On the flip side, buildings built before 2000 accounted for negative net absorption of over 100 million square feet.”
Tech companies are focused on leasing the “highest quality and most interesting product,” according to Connolly. He pointed out that remote work isn’t working for most tech companies because culture, mentorship, relationships, collaboration, and trust all suffer in a remote setting. Because of that, Connolly said:

To attract their teams to come together in person, more companies are shifting to exciting space and highly dynamic locations. The goal is to offer a more attractive daily experience than the convenience of the dining room table. Simply put, a growing percentage of office users are focused on a narrowing percentage of high-quality inventory. Demanded rents are rising for the best properties in midtown Atlanta, Buckhead Atlanta, downtown Austin, the Domain; Tempe, the south end of Charlotte, the Heights in Tampa to name just a few. Conversely, commodity or suburban products dressed up with a pickleball court just won’t cut it with Amazon, Google, or Microsoft.

This trend also plays into Cousins’ strategy. The company has spent the past couple of years upgrading the quality of its portfolio. It sold $1.2 billion of less relevant properties and redeployed the proceeds into the development or acquisition of “highly differentiated amenitized properties.”
The right properties in the right location
Cousins Properties is benefiting from its unique strategy of owning the highest quality properties in the best Sun Belt markets. Demand for these properties is surging because employers — tech companies, in particular — are leasing them to recruit talent and entice their current workforce back to the office. That bodes well for Cousins’ future, as it should help drive above-average growth for the office REIT in the coming years.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Matthew DiLallo has positions in Alphabet (C shares), Amazon, and Cousins Properties. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Microsoft. The Motley Fool has a disclosure policy. –

There’s been a significant migration of people to the Sun Belt region over the years. From retirees to remote workers to job-seeking millennials, more people are moving south every day. Its warmer weather, the lower overall cost of living, and fewer government regulations, compared to larger cities in the Northern part of the country, are among the many factors drawing people to the region.

However, the population isn’t the only thing migrating to the Sun Belt region. An increasing number of corporations are relocating and expanding across the area. That’s driving demand for office space in leading Sun Belt markets. This trend is benefiting Cousins Properties (NYSE: CUZ), a real estate investment trust (REIT) focused on owning high-quality office buildings in that part of the country.

Image source: Getty Images.

Strong demand for its Sun Belt properties

Cousins Properties has “been proactively assembling a Sun Belt trophy office portfolio for over a decade,” according to a statement by CEO Colin Connolly in the first-quarter earnings release. That strategy is starting to pay big dividends.

The office REIT noted that it signed 324,000 square feet of leases during the quarter. That included 224,000 square feet of new and expansion leases, representing 69% of the total. This strong demand for space in its buildings drove a 15.4% increase in second-generation net rent per square foot, compared to the prior lease rate.

According to Connolly in the accompanying conference call, the big driver is that “office demand is migrating to the Sun Belt in a significant way.” He pointed out that “the Sun Belt represents only 26% of the national office inventory and yet accounted for 58% of new-to-market leasing in 2021.” That’s primarily due to a hiring spree by the tech industry.

The CEO pointed out that the sector has added 372,000 office jobs nationally since early 2020, leading all other sectors. They’re bringing many of these jobs to Sun Belt cities like Nashville, The Research Triangle, Phoenix, Austin, Tampa, Charlotte, Dallas, and Atlanta, all of which are cities where Cousins owns properties.

Connolly noted that the tech industry is following the talent migration to the Sun Belt. He stated on the call that: 

Select cities in the Sun Belt have meaningfully urbanized over the last decade. These markets now offer an exciting alternative to gateway cities at a much lower cost. Not surprising, employers are following the talent.

Quality matters as much as location

Companies see having high-quality office space as an important tool for recruiting this talent. That’s leading them to prioritize leasing space in higher-quality buildings. Because of that, newer buildings with modern amenities are in much higher demand than older buildings.

Connolly noted on the call that: “Over the past few quarters, buildings built since 2015 accounted for 62 million square feet of national net absorption. On the flip side, buildings built before 2000 accounted for negative net absorption of over 100 million square feet.”

Tech companies are focused on leasing the “highest quality and most interesting product,” according to Connolly. He pointed out that remote work isn’t working for most tech companies because culture, mentorship, relationships, collaboration, and trust all suffer in a remote setting. Because of that, Connolly said:

To attract their teams to come together in person, more companies are shifting to exciting space and highly dynamic locations. The goal is to offer a more attractive daily experience than the convenience of the dining room table. Simply put, a growing percentage of office users are focused on a narrowing percentage of high-quality inventory. Demanded rents are rising for the best properties in midtown Atlanta, Buckhead Atlanta, downtown Austin, the Domain; Tempe, the south end of Charlotte, the Heights in Tampa to name just a few. Conversely, commodity or suburban products dressed up with a pickleball court just won’t cut it with Amazon, Google, or Microsoft.

This trend also plays into Cousins’ strategy. The company has spent the past couple of years upgrading the quality of its portfolio. It sold $1.2 billion of less relevant properties and redeployed the proceeds into the development or acquisition of “highly differentiated amenitized properties.”

The right properties in the right location

Cousins Properties is benefiting from its unique strategy of owning the highest quality properties in the best Sun Belt markets. Demand for these properties is surging because employers — tech companies, in particular — are leasing them to recruit talent and entice their current workforce back to the office. That bodes well for Cousins’ future, as it should help drive above-average growth for the office REIT in the coming years.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Matthew DiLallo has positions in Alphabet (C shares), Amazon, and Cousins Properties. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Microsoft. The Motley Fool has a disclosure policy.

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