The office segment continues to face headwinds with both vacancies and demand in the second quarter.
Overall, vacancies went up 55 basis points (bps) in the three months through June compared with the previous quarter, according to a report from Cushman & Wakefield. That represents a 20.5 percent vacancy rate, an all-time high. Since the onset of the pandemic, the category has gone up a total of 785 bps.
“This is a greater increase than in the wake of the Great Financial Crisis (+470 bps from 2007-2010) but still well below the Dot-Com increase (+915 bps from 2000-2003),” the research firm wrote.
For the office markets, net absorption improved from the abysmal nearly -25.5 million figure in the first quarter. However, the three months ending June still came in the red at -18.23 million. The category was only positive in a third of office markets in the second quarter, which includes Binghamton, New York, Charleston, South Carolina, Charlotte, North Carolina, New Haven Connecticut, and Pittsburgh Pennsylvania.
Office supply has dipped to the lowest level in a decade. C&W attributes this to high construction and capital costs, the latter was due to high interest rates. Plus, “market fundamentals” are another factor, according to the firm.
“Office deliveries have receded from recent highs, and 2024 is currently on track to see the lowest amount of new deliveries in the U.S. since 2014,”
“In the first half of the year, 17.7 msf of new office space was delivered in the 93 U.S. office markets tracked by Cushman & Wakefield, which is 27% below the H1 average over the past five years (24.2 msf). New deliveries added just 0.3% to overall office inventory in the past six months.”
One positive note is national asking rents edged up to $37.91 in the second quarter, from $37.78 in the previous three months. A year ago, the figure was pegged at $37.37.
As far as the outlook goes, Cushman provided a mixed bag. For example, don’t expect new deliveries to get much better. The research group expects them to be 25% of what the “recent historical norm” was.
Meanwhile, Cushman expects hybrid work to balance out in the second half of next year. “As hybrid space recalibration slows down and both headcount growth and new business formation create office demand,” it wrote.
Overall, the key to getting the office market back to top performance is minimizing vacancies. Cushman sees “opportunities and challenges in the years ahead,” for the market.