Office Availability Levels Drop for the First Time in Five Years

The US office market has experienced an acceleration in leasing activity and a slowdown of new supply, pushing availability levels down for the first time in more than five years, according to JLL’s Q3 office market dynamics report.

After reaching a post-pandemic high last quarter, leasing activity continued to grow marginally to 50.4 million square feet. Gateway and secondary markets both outperformed the national total, growing 2.5% and 4.6% respectively, while tertiary market leasing fell 18.7% quarter over quarter.

Meanwhile downsizing trends normalized as tenants appeared to become more comfortable with their existing office footprints. At the same time, new supply has fallen dramatically and a record volume of inventory is being removed for conversion and redevelopment. Through Q3, more than 30 million square feet of office has been planned for removal, predominantly for office-to-residential conversions. This has led to a tightening office market across the country for the first time since 2019, according to JLL.

This dynamic has been bolstered by the Fed’s 50 bps rate cut, a relatively stable labor market, strong corporate earnings and progress on inflation.

The Sun Belt has continued to outperform national totals, growing by 9.4% quarter over quarter to reach 96% of pre-pandemic leasing activity over the past six months. The region is faring well thanks to corporate relocations and expansions out of gateway markets targeting lower costs in Sun Belt secondary markets, the report said.

Net absorption remained negative during the third quarter but improved by 8% quarter over quarter to -8.2 million square feet. This drove vacancy to 22.2% across the country. However occupancy loss is not uniform and more than half of the more than 1 billion square feet of vacant office space is within less than 7% of office buildings, said JLL.

Tenants continue to show a strong preference for higher-quality and newer offices, with buildings constructed since 2015 generating positive net absorption. Well-maintained historical buildings developed before 1970 also are seeing success, with availability rates declining for the past four quarters.

Expansionary demand is being diverted into buildings constructed between 10 and 20 years ago or older buildings that have undergone extensive renovations in the past decade, said JLL. Over the past year, renovated buildings have comprised close to 30% of expansionary activity and 2000-2014 vintage buildings are capturing almost 20%.

Office development continues to decline from already record low volume, the report said. Just over half a million square feet broke ground in Q3, and less than 5 million square feet has broken ground in the past year. The previous historical low for a 12-month period was 6.8 million square feet in 2009.

The outlook for long-term office demand continues to improve as employers make efforts to drive greater office attendance, JLL said. Q3 saw a sustained push for large employers who had already established hybrid policies to further strengthen those requirements.