Jacksonville Office Market: 7 Essential Insights for Investors

  1. Impact of Recessionary Headwinds and Structural Changes: Jacksonville’s office market is feeling the effects of recessionary pressures and changes in physical occupancy, but deals continue to occur.
  2. Healthy Leasing Activity: Office leasing activity has been strong, with rent growth improving significantly over the past year, now exceeding the national average by more than three times.
  3. Stable Vacancy Rate: The vacancy rate has stabilized at 8.9%, with a slower pace of sublease space entering the market. Tenants signed over 30 key lease deals over 10,000 SF in the past year.
  4. Future Absorption Trends: While trailing 12-month net absorption is strong at 600,000 SF, is expected to be negative, continuing into 2024.
  5. Occupancy and Vacancy Forecasts: Structural shifts in workplace occupancy trends are expected to increase overall vacancy, with CoStar forecasting just below 10% vacancy.  A moderate downside forecast suggests vacancy could reach 10.2% due to increased work-from-home trends.
  6. Speculative Development Restraints: Speculative office development is minimal, with only 340,000 SF of office space under construction, mostly office/medical space. Proposed buildings in Durbin Park and Nocatee have yet to make plans to break ground.
  7. Rent Growth Trends: Rent growth remains positive at 2.9% year-over-year, but a decelerating trend in deal activity may apply downward pressure on rent growth, projected to slow to mid-1% by the end of the year, still ahead of the national average.

    Impact of Recessionary Headwinds and Structural Changes

    Office leasing fundamentals in Jacksonville are sound. Companies continue to close deals despite headwinds in office demand. The vacancy rate will reach 9% to 10% by year-end.

    Sublease Availability Comparisons

    Jacksonville faces an elevated rate of sublease availability due to remote work impacts. However, it has less sublease space than Orlando, Tampa, and Fort Lauderdale. Jacksonville has the second-lowest total sublease space among Florida’s primary office markets, just behind Miami.

    Healthy Leasing Activity

    Office leasing demand remains healthy in Jacksonville. The market has outperformed several peer markets over the last year. The trailing 12-month net absorption is 600,000 SF. Fewer move-outs than expected occurred.

    Significant Lease Deals

    Tenants signed over 30 leases larger than 10,000 SF in the past year, a slight increase over the previous year. The largest deal was a 153,000-SF lease by utility company JEA. JEA’s new headquarters is at 225 N Pearl St in Downtown Northbank.

    Major Lease Agreements

    Stellar Energy leased 145,000 SF of office space in the Southside submarket. The property will serve as Stellar Energy’s headquarters from March 2024. Gate Petroleum signed a 70,800 SF lease in Mandarin in July 2022, rounding out the top three deals.

    Absorption Trends and Future Outlook

    Trailing 12-month net absorption is strong at 600,000 SF. However, quarterly absorption will likely be negative. This trend will likely continue into 2024 due to structural shifts in workplace occupancy.

    Rent Growth and Market Activity

    Rent growth in Jacksonville remains positive at 2.9% year-over-year. A decelerating trend in deal activity may pressure rent growth downward. CoStar projects rent growth will slow to the mid-1% by the end of the year. Jacksonville’s rent growth still surpasses the national average.

    Positive Rent Growth Trajectory

    Rent growth in Jacksonville’s office market is on a positive trajectory. It is rising at one of the fastest rates in Florida. The current average office asking rent is $24.00/SF, with an annual growth of 2.9%. This rate is well ahead of the market’s 10-year average and the national growth rate of 0.7%.

    Competitive Rent Rates

    Rents in Jacksonville are discounted compared to neighboring markets. Orlando and Tampa’s average rents are around $28.00/SF, while the national index is $35.00/SF. Landlords are holding or increasing rates despite decelerating leasing demand. Rising interest rates and insurance costs impact operating budgets.

    Urban Core Rent Performance

    Rent performance in Jacksonville’s urban core is improving. Occupancy has not yet returned to pre-pandemic levels. Rent growth is nearly 3% annually in Downtown Northbank and Downtown Southbank. However, growth will likely slow to 1% by the end of the year

    High-Value Lease Deals

    Early this year saw high-value deals in the urban core. In February, Rivkin Radler leased 17,501 SF at 1301 Riverplace Blvd for $26.00/SF, and law firm Adams and Reese LLP renewed 12,435 SF at 501 Riverside in Northbank for $25.00/SF.

    Market Dynamics and Projections

    Jacksonville’s rent growth surpasses the national average. Despite challenges, landlords maintain or increase rents. Structural changes’ impact on office demand remains a concern, and future occupancy levels are uncertain.

    Leasing Fundamentals and Vacancy Rates

    Leasing fundamentals in Jacksonville are sound. Deals continue despite headwinds to office demand. Vacancy remains flat at 8.9%, below the national average. It will likely be 9% to 10% by year-end.

    Sublease Availability and Leasing Demand

    Jacksonville has less sublease space than other Florida markets. Leasing demand remains healthy, outperforming several peer markets. The trailing 12-month net absorption is 600,000 SF. Fewer move-outs than expected occurred.

    Speculative Construction and New Development

    In recent years, developers have limited speculative construction. New office development remains elevated compared to Jacksonville’s 10-year average. Currently, 340,000 SF is under construction, representing 0.5% of total inventory. In the past year, developers delivered 520,000 SF of new office space.

    Impact of New Supply on Leasing Fundamentals

    The new supply has not negatively impacted leasing fundamentals. The latest developments are build-to-suit projects. Rising interest rates and increased costs for construction materials and labor make projects challenging. An expected slowdown in office demand also discourages new development.

    FIS Headquarters Completion

    Developers completed the highly anticipated FIS headquarters building in June 2022. Located on Riverside Avenue in the Downtown Northbank submarket, the project took two years to complete. In 2020, the Fortune 500 company acquired the 4.5-acre riverfront site for $14 million.

    Employment and Economic Impact

    FIS plans to employ 1,700 people at its headquarters by 2030, with an average salary projected to be at least $85,000. This development will significantly impact the area’s economy.

    Market Dynamics and Projections

    Jacksonville’s office market remains resilient despite new developments. The limited speculative construction helps maintain stable leasing fundamentals. Future office demand and high construction costs will influence new projects.

    Leasing Fundamentals and Vacancy Rates

    Leasing fundamentals in Jacksonville are sound. Deals continue despite headwinds to office demand. Vacancy remains flat at 8.9%, below the national average.

    Sublease Availability and Leasing Demand

    Jacksonville has less sublease space than other Florida markets. Leasing demand remains healthy, outperforming several peer markets. The trailing 12-month net absorption is 600,000 SF. Fewer move-outs than expected occurred.

    Investor Interest and Market Dynamics

    Investors continue targeting office opportunities in Jacksonville. Pricing in other key Florida metros increases competition for key assets. Despite a slowdown in deal activity expected, Jacksonville remains attractive. Total sales volume for the past year is $516 million, down from $880 million in 2021 but still strong.

    Higher Cap Rates and Investor Returns

    Jacksonville offers higher cap rates than other Florida markets, which provides quicker upside potential and faster returns for investors. The Federal Reserve has raised interest rates multiple times to curb inflation, resulting in a more than 500 basis point increase in the federal funds rate.

    Impact of Rising Interest Rates

    Debt has become much more expensive due to rising interest rates. Despite this, private investors have been active, closing nearly 50% of all office investment sales in the past year. Many investors will likely stay on the sidelines until the Fed stops raising interest rates.

    Significant Property Sales

    Real Capital Solutions’ acquisition of JEA’s new headquarters was the largest single property sale. The property in Downtown Northbank sold for $95 million ($603/SF) in November 2022. JEA began occupancy of their 20-year lease in December 2022.

    Noteworthy Transactions

    Another notable sale was the Prudential Office Tower in Downtown Jacksonville’s Southbank area. The 707,000 SF, 4-star office building sold for $70 million ($99/SF) in August 2022. Chicago-based Bradford Allen Realty Services purchased the property, which was roughly 80% leased at the time of sale.

    Market Resilience and Future Outlook

    Jacksonville’s office market remains resilient despite rising interest rates and economic headwinds. Higher cap rates and investor interest continue to drive activity. However, investment volume will likely slow.

    Leasing Fundamentals and Vacancy Rates

    Leasing fundamentals in Jacksonville are sound. Deals continue despite headwinds to office demand. Vacancy remains flat at 8.9%, below the national average. It is expected to be 9% to 10% by year-end.

    Closing Thoughts

    Jacksonville’s office market shows resilience with rising rents and investor interest. Significant sales highlight its potential. Despite challenges, opportunities abound. Contact Lumicre for your investment needs.

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