Office Absorption Turns Positive in the South

For the first time in more than a year, a region realized positive net absorption in the office sector when the South ecorded minor growth in Q4 2023, according to the Newmark Office View Report for Q4.

Net absorption totaled positive 1.5 million square feet during the quarter. Despite this, occupancy declined overall in the South when looking overall at 2023.

“Minimal leasing activity as a percent of inventory was relatively ubiquitous across most regions, indicating a slowdown in the momentum that had been gained in the prior two years in some secondary and Sun Belt markets,” Newmark said.

Nationally, net absorption continued to post losses in Q4 2023, driven most strongly by the West and East.

Office-using employment was less impacted during the pandemic and has maintained a consistent pace of recovery, measuring 1.9 million jobs above pre-pandemic levels, according to the report.

Nationally, nonfarm employment has recovered to pre-pandemic levels in June 2022 and is up 20.9% from the pandemic low in April 2020.

Nonetheless, leasing activity decelerated nationally to an estimated 0.8% of inventory, compared to the quarterly average of 1.4% realized between 2011 and 2019.

It continues to be high-quality office assets that are in demand. They commanded a disproportionate share of the market’s limited activity, with Class A accounting for 53.1% of all leasing in Q4 2023.

This is slightly down from a recent high of 54.6% in Q4 2021.

Class A vacancy increased 220 basis points year over year, in line with the overall market.

Class A (four-star) inventory recorded vacancy that was 180 basis points higher than trophy (five-star) at the end of the fourth quarter of 2023, according to the report. “This difference has increased 110 basis points since the end of 2019,” it said.

Employment now exceeds pre-pandemic levels across office-using industries. The recovery in TAMI has been particularly strong, despite significant layoffs in the information sector in 2023, with employment 10.3% above February 2020 levels.

The report indicated “Impressive gains have been made across a range of professional and business services, which in the aggregate are up 7% from February 2020” and “legal services have more than fully recovered as well, but less than these other categories.”

Business formation accelerated healthily in November 2023 with 464,838 new business applications filed, a 10% boost from September 2022. Every region showed an increase, led by the Northeast at 12.2% compared to this time last year.