U.S. Office Vacancy and Sublease Space Reach Record Highs in Q2 2023
The U.S. office market continued to soften in Q2 2023, with negative net absorption, and new record highs for vacancy and sublease space. The vacancy rate rose to 16.4%, surpassing the record peak of 16.3% from the Global Financial Crisis. However, positive net absorption was reported in 37% of surveyed metro office markets, an improvement from Q1’s 24%. National office absorption totaled negative 14.4 million square feet, compared to negative 25.4 million square feet in Q1 2023.
Total construction activity declined, with 88.4 million square feet underway, a decrease of 46% from the peak in Q3 2020. Sublease space availability hit a record 259 million square feet, an increase from Q1’s 254 million square feet.
The gap between asking and effective rents remained wide, with significant tenant improvement allowances and rental abatement being offered for new 10-year leases for Class A space. Large occupiers are typically reducing their office space by 20-30% on new leases and renewals.
As more sublease space returns to the market, landlords face challenges in terms of lost revenue and the need to appropriately price and position these spaces. Repricing seems likely in the rental market due to downsizing, an increase in sublease space, and rising vacancy rates.
Moving forward, performance and demand variations are expected to become more pronounced, with factors such as space class, age, market location, and business sectors playing a role. High-quality spaces are predicted to be more desirable as companies strive to create optimal work environments to attract and retain talent and encourage the return to the office.
