Increased leasing activity over the past 12 months has positively impacted market statistics.
Key Takeaways for the U.S. Office Market:
- Increased leasing activity over the past 12 months has positively impacted market statistics.
- Sublease availability was down for the fourth consecutive quarter.
- The 54.6 million SF under construction was 65.2% below the peak of 157.0 million SF in the first quarter of 2019.
The U.S. office market continued to contend with the post-Covid slowdown that started in 2020. Metrics remained soft, new construction starts stopped in most markets, and concession packages were at an all-time high. While there is cautious optimism that the worst may be in the past, market fundamentals remain firmly in the tenant’s favor. Although the 17.6% overall national vacancy is an all-time high, it only increased 10 basis points from last quarter. This relatively small increase was aided by deliveries adding only 7.2 million square feet of new space to the inventory. This limited additional vacancies from these new projects since pre-leasing commitments were below 50% in many markets. A renewed focus on the tenant experience from morning to evening drives many property owners to invest in creating or improving the amenity mix. This includes renovating tenant lounges, fitness centers, conference facilities, and outdoor spaces. Owners are curating retail amenities for tenants by creating an environment they never need to leave until they head home. While this isn’t new, it’s even more important since tenants look for highly concentrated amenities in and around properties in the best locations. This is just one-way property owners can help companies bring employees back to the office.
SUBLEASE AVAILABILITY
Sublease availability in the U.S. office market fell for the fourth consecutive quarter after peaking one year ago. In many markets with limited options in the most coveted buildings, sublease space has competed with coworking space to offer flexible lengths of time for a built-out space. Many companies that had adopted a hybrid work model are now pulling space off the sublease market to accommodate all office employees simultaneously.
LABOR MARKET
Office-using job growth was positive but limited as of June 2024. Financial Activities grew 0.5% over last year, while Professional & Business Services rose 0.3%. However, the employment rate in the Information industry employment declined by 0.5%. Overall, employers remain in a holding pattern, trying to be prepared for a recession while not conducting any recent mass layoffs. The unemployment rate has risen gradually since the beginning of the year, reaching 4.1% in June, a 40 basis-point increase from the end of 2023.
IMPACT FROM CAPITAL MARKETS
More than $500 billion in office loans were due to mature between 2024 and 2028, 41.0% throughout 2024 and another 20.1% in 2025. Successful extension, sale, or recapitalization of these loans will directly impact the leasing market and owners’ ability to do deals. Tenants pay extra attention to the loan situation for each prospective building when they tour the market, a major factor in their ultimate decision. Office has the highest delinquency rate of the major asset classes, ending July at 8.09%. This is an increase from 4.96% one year ago. Some owner-users are finding opportunities to sell their property and lease it back to save money.
LOOKING AHEAD
Leasing activity picked up in the second half of 2023 and early 2024, and occupancies will be reflected in market statistics over the next six to 12 months. The decline in new construction starts should further tighten top-tier, Class A property availability and force some tenants to renew while awaiting relocation options. Asking rents and concession packages are expected to remain at current levels.
Vacancy
- The U.S. average office vacancy rate increased to 17.6%, up 10 basis points from last quarter.
- The CBD vacancy rate was 18.7%, up 20 basis points from last quarter and 130 from one year ago.
- The suburban vacancy rate increased to 17.0%, up 10 basis points from the first quarter.
- The Northeast, the region with the largest inventory, had the lowest vacancy, 16.4%, unchanged from last quarter.
- San Francisco has the highest vacancy rate in the country at 30%, followed by Houston at 26.9% and Chicago at 24.5%.
Net Absorption
- U.S. net absorption for the quarter was negative 5.4million SF, bringing the year-to-date total to negative 27.3 million SF. However, that was a significant improvement from the average quarterly losses of negative 14.0 million SF for the past two years.
- As of mid-year, the CBDs had -11.0 million SF returned to the market, about 40.3% of the total.
- In the first half of the year, 13.3 million SF was returned to Class A buildings and 14.2 million SF to Class B buildings.
- The Northeast, buoyed by Manhattan, posted a positive absorption of 1.3 million SF in the second quarter, and the South also had positive absorption of 261,000 SF.
Rental Rates
- The average asking rate of $36.87/SF was down 0.1% from last quarter but up 1.05% from the second quarter of 2023.
- The year-over-year rent increase was the smallest in over five years, while the quarterly decline was the first in two years.
- The Class A average rate of $42.44/SF was unchanged from last quarter and up 0.9% from one year ago.
- The Class B average rate of $30.27/SF was down 0.3% from last quarter but up 0.6% from the same point in 2023.
Construction Activity
- The pipeline’s 54.6 million SF is 65.2% below its peak of 157.0 million SF in the first quarter of 2019.
- Only 16 of the 78 markets tracked by Colliers have more than 1.0 million SF under construction.
- Dallas’s 6.5 million SF in development was the highest individual market total and will increase the region’s inventory by 2.2%.
- The 7.2 million SF completed in the U.S. during the quarter brings the total new supply to 19.4 million SF added to the inventory year-to-date.
- The first half of 2024 was the lowest mid-year delivery total in over 10 years.
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