There has been a significant migration of people to the Sun Belt region over the years. From retirees to remote workers to millennials looking for work, more people are moving south every day. Its warmer weather, lower overall cost of living, and fewer government regulations, compared to major cities in the north of the country, are among the many factors that draw people to the region.
However, the population is not alone in migrating to the Sun Belt region. A growing number of companies are relocating and expanding into the region. This is driving demand for office space in Sun Belt’s core markets. This trend benefits Cousin properties (BECAUSE -0.84%)a real estate investment trust (REITs) focused on owning high-quality office properties in this part of the country.
Strong demand for its Sun Belt properties
Cousins Properties “has been proactively assembling a Sun Belt Trophy office portfolio for more than a decade,” according to a statement from CEO Colin Connolly in the first quarter earnings release. This strategy is starting to pay off.
the REIT office noted that it signed 324,000 square feet of leases during the quarter. This included 224,000 square feet of new leases and expansion, representing 69% of the total. This strong demand for space in its buildings has resulted in a 15.4% increase in second generation net rent per square foot, compared to the previous rental rate.
According to Connolly in the accompanying conference call, the main 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 represented 58% of the new rentals on the market in 2021”. This is mostly due to a hiring spree in the tech industry.
The CEO pointed out that the sector has added 372,000 office jobs nationwide since the start of 2020, leading all other sectors. They bring many of those jobs to cities in the Sun Belt 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 tracks talent migration to the solar belt. He said on the call that:
Some cities in the Sun Belt have become significantly urbanized over the past decade. These markets now offer an attractive alternative to hub cities at a much lower cost. No wonder, employers follow talent.
Quality matters as much as location
Companies consider that having quality office space is an important tool for recruiting these talents. This leads them to favor the rental of space in buildings of better quality. For this reason, new buildings with modern equipment are much more in demand than older buildings.
Connolly noted on the call that: “In recent quarters, buildings constructed since 2015 accounted for 62 million square feet of national net absorption. On the other hand, buildings constructed before 2000 represented negative net absorption. of over 100 million square feet.”
Tech companies are focused on leasing the “highest quality, most valuable product,” according to Connolly. He pointed out that remote work doesn’t work for most tech companies because culture, mentoring, relationships, collaboration and trust all suffer in a remote environment. Because of this, Connolly said:
To entice their teams to meet in person, more and more companies are turning to exciting spaces and high-energy locations. The goal is to provide a more engaging everyday experience than the convenience of the dining room table. Simply put, a growing percentage of desktop users are focusing on a small percentage of high-quality inventory. Asking Rents Are Rising for Top Properties in Downtown Atlanta, Buckhead Atlanta, Downtown Austin, The Estate; Tempe, the south end of Charlotte, the heights of Tampa to name a few. Conversely, staples or commuters dressed in a pickleball court just won’t cut it with AmazonGoogle or Microsoft.
This trend also plays into Cousins’ strategy. The company has spent the past two years improving the quality of its portfolio. It sold $1.2 billion of less relevant properties and redeployed the proceeds into developing or acquiring “highly differentiated developed properties”.
The right properties in the right place
Cousins Properties benefits from its unique strategy of owning the highest quality properties in the Sun Belt’s best markets. Demand for these properties is growing because employers — tech companies, in particular — are renting them out to recruit talent and entice their current workforce back into the office. This bodes well for the future of Cousins, as it should help drive above-average growth for the office REIT in the years to come.