Net Absorption of Office Space Continues to Shrink in Q2

The depressed state of the U.S. office market is well documented. So it may not be surprising that tenants in the market are asking for more detail about the loan health of prospective office buildings, as reported in Transwestern’s office market report for 2Q 2023. “It’s a trend that “will challenge select landlords,” Transwestern commented.

In Q2, net absorption of office space shrank by 15.9 MSF, including both direct and sublet space. Only 19 of the 51 markets Transwestern tracks showed positive absorption, mostly in smaller metros. However, had it not been for the fully pre-leased delivery of Amazon’s second headquarters, one of them — Northern Virginia – would have been in negative territory.

Markets seeing the least rise in availability since the pandemic began include Inland Empire, New Orleans, Las Vegas, Westchester, Miami, and Oklahoma City.

As for vacancies, the report predicts that the rate is not likely to stabilize until 2024. The overall vacancy rate rose 30 basis points to 13.5% and is up 400 basis points since the start of the pandemic. 

In contrast, the vacancy rate for buildings built in the last 10 years is at 10.2% as tenants hunt for quality. “Asking rents rose 1.4% YoY, a deceleration compared to the average growth rate of 3.2% pre-COVID. Asking rents continue to rise as landlords offer above-average concessions in most major markets, which in turn puts downward pressure on the effective rent,” the report noted. The U.S. average asking rent is around $28, its data shows.

Since the beginning of the pandemic, the two most expensive markets, San Francisco and New York, have experienced the largest declines in rental rates at 14% and 11%, respectively. Miami has experienced the reverse with strong gains in rents, driven by demand in the urban core, Transwestern reported.

At the same time, the 4.7% year over year drop in new construction could create opportunities for some landlords, as some tenants are being driven to explore 2nd gen Class A space. Boston leads the nation with 18 million SF under construction. Seattle comes in a distant second with 11.8 million SF on the way.

“Recovery will be long and uneven. We expect tenants will right size on average 20%. Demolitions and conversions of obsolete office stock should help alleviate some of this pressure but is not a silver bullet solution to recovery,” Transwestern concluded.