Office-using employment in the US grew 6.1% from pre-pandemic levels during the second quarter, reaching a new post-2000 high. While the rate of growth has moderated in 2023 and 2024, this represents a quicker recovery than the sector experienced following the Great Financial Crisis.
This performance has been supported by a stable employment market, but rising unemployment in the future could weaken office demand, according to Compstak’s Q2 office market overview.
The average lease term for renewing and extending tenants surpassed the 2018-2019 average during the second quarter for the first time since early 2020, reaching 94.1 months. This growth was largely driven by law firms and government tenants, according to the report. The average lease length for new leases and expansions remains at 122 months, just below pre-pandemic levels. Concession rates remain elevated in gateway markets, the report said.
Effective rents for prime Class A buildings hit a post-COVID high. Triple-digit deals increased to 5.2% of deals, up from 3.1% in 2019. Prime Class A rents have increased by 43.4% from their post-COVID low in late 2020, while other Class A and Class B/C rents have grown by more than 20% since an early 2021 trough, said Compstak.
Overall office vacancy nationwide has been steadily increasing for 18 consecutive quarters, and the NCREIF Property Index of institutional-grade assets has revealed a shift in the relationship among suburban, CBD and national office vacancies since the third quarter of 2021, the report noted. The suburban office vacancy rate was higher than that of CBD offices in the third quarter of 2021, but since then the CBD office vacancy rate has grown faster and the gap between them has continued to widen. As of Q2 2024, the suburban office vacancy rate is 310 basis points lower than the CBD average and 160 basis points below the US office average.
In the wake of the pandemic, hybrid work remains commonplace but the number of days worked from the office has been gradually increasing. In the latest June 2024 survey, 28.6% of paid full days were worked from home, up slightly from June 2023’s average days worked from home, according to the report.
Over the next two years, more than 20% of office leases will expire, with the peak year for their original execution being 2019, and another 16.8% executed since 2020. More than 42% of today’s current office leases will expire from Q3 2026 through 2030 across major US gateway markets, said the report.