Office Market Remains a Mixed Bag as Return to Office Strategies Vary

As the office market continues to search for stability in the wake of COVID-19 disruption, there are signs the sector’s rapid descent could be slowing but indicators are mixed from market to market.

Momentum in office net absorption across major markets ebbed somewhat during the first quarter, shifting back into the red after posting the greatest three-month total since 2021 during the fourth quarter of last year, according to Marcus & Millichap’s second quarter national office report. Only 11 markets had reductions over 500,000 feet, and the markets with increasing vacancy had minimal quarter-over-quarter adjustment, the report said. Meanwhile, 18 of the 50 markets studied reported falling or flat vacancy during the first quarter, led by San Jose with a drop of 90 basis points.

Half of the major markets studied are on track to receive more than 1 million square feet of new office space this year, primarily concentrated in eight markets including Boston, New York City, Dallas-Fort Worth and Austin. Marcus & Millichap said some new projects could be tabled as construction costs remain high.

“This would further moderate supply pressure in most major metros, painting a clearer picture of company demand for existing space,” said the report.

Average asking rent fell year-over-year across the country, ending 1 percent lower than peak rents in early 2023. New supply with higher asking rates helped push rents up quarter over quarter. Boston logged the greatest volume of deliveries over the 12 months ended in March, equaling more than 6.6 million square feet, which coincided with mean asking rent surging more than 15 percent year-over-year.

Return to work remains a key factor in the health of the office market, and the approach enterprises are taking remains fragmented. Tech companies showed strong interest in return to office with a flurry of leases signed during the first quarter. Growing companies focused on developing artificial intelligence programs were particularly strong in moving back toward collaborative office formats, the report found. Nvidia and OpenAI each signed 100,000-plus-square-foot office leases in the Bay Area, in addition to acquiring real estate. Other larger tech companies seem to be moving in the opposite direction, cutting leased office space, simplifying operations and reducing payroll.

The divide between suburban and urban demand is likely to widen further, Marcus & Millichap predicted. While the suburbs saw negative net absorption in the first quarter, the 1.3 million-square-foot slide was more minimal, leaving vacancy in these properties lower than in central business districts.

“Tenants right-sizing their footprints have exhibited a preference for highly-amenitized space, particularly in buildings constructed post-2010 with smaller floor plans,” the report said.