Secondary Markets Drive Office Leasing Uptick in Q3

Buoyed by growth in secondary markets, office leasing activity rose by almost 8% in the third quarter, signaling a willingness among tenants to make longer-term real estate decisions.  

A new report from JLL notes that gross leasing volume approached 40 million square feet in Q3 for the first time since the onset of the COVID-19 pandemic. Total deal volume is up 1.7% year-over-year but still remains 43.8% below 2019 levels. Activity was mainly concentrated in secondary markets in the Sun Belt and West.

Overall, macroeconomic factors remained positive for the sector, though slightly downgraded from prior forecasts. Occupancy losses decreased significantly, with net absorption of -7.3 million square feet, the lowest quarterly metric since the pandemic began. Sublease space also contracted during Q3, “providing further evidence that the market is an inflection point,” the report states.

Conditions are likely to remain balanced in favor of tenants through the end of next year, the report predicts.

“Flight to quality and an accelerated rate of relocations to newer supply will lead to even greater divergence in performance across office assets,” JLL’s Phil Ryan writes. “Even with a more gradual reentry process and potentially more balanced hybrid plans than initially expected, the crucial role that physical offices play in fostering corporate culture, productivity and innovation will underline the longer-term need for space that meets evolving tenant and employee preferences.”

Increasingly, occupiers making real estate decisions in the wake of the pandemic are choosing newer, better Class A product. More than half of all new leases signed during the pandemic have been concentrated in Class A offices, according to Cushman & Wakefield data, and the premium for newer assets is 35.2%, more than twice pre-COVID figures.  Rents in CBDs have also tended to move more sharply than suburban rents.

“The physical office will continue to have some role to play in the future of work,” Cushman & Wakefield economist Rebecca Rockey wrote in a recent report outlining the future of the sector. “And although there are a myriad of occupiers with vastly different needs, we know that newer, better quality office product, which usually outperforms, did so to a greater degree during the pandemic. And that trend is expected to stick.”