US office market sees continued challenges in Q1 data reports
Office market reports from major commercial real estate brokerages point to a market that's yet to find its post-pandemic footing.
By Ashley Fahey
The national office market is off to a tough start this year, with leasing activity continuing to slow, vacancy rising and the ever-looming threat of debt maturities.
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U.S. office leasing volume fell to 38.5 million square feet in the first three months of 2023, the third consecutive quarter of slowing demand and a 9.8% decline from Q4 2020, according to Jones Lang Lasalle Inc. (NYSE: JLL). Leasing activity was also 10.7% less than was was recorded in Q4 2022.
Technology has also been dethroned as the top sector for office leasing activity, with banking and finance being the No. 1 industry for office lease deals in the first quarter, JLL found, comprising 29.4 million square feet of deals. Tech leasing, the second-biggest industry to lease office space in Q1, slowed 53.3% between 2019 and early 2023.
Leasing activity declined 25% on a quarterly basis, according to CBRE Group Inc.'s (NYSE: CBRE) Q1 office market report. Cushman & Wakefield PLC (NYSE: CWK) had a similar assessment, finding activity dropped 23% from Q4 2020, reaching levels observed during the depths of the Covid-19 pandemic.
Q1 saw 16.5 million square feet of negative net absorption, the weakest quarter for office demand in two years, says CBRE. Vacancy is also on the rise, hitting 17.8% by CBRE's assessment; 20.2%, according to JLL; and 18.6% by Cushman & Wakefield's measurement.
Net absorption was positive in only 15 of 55 markets tracked by CBRE, with Sun Belt markets like Miami and Nashville, Tennessee, experiencing positive absorption while demand fell most in places like San Francisco, Boston and Los Angeles. When looking at the Class A office market, 25 markets tracked by Cushman posted positive absorption, underscoring a continued flight-to-quality trend.
Sublease space nationally grew by another 12.4 million square feet in Q1, reaching a record high of 189 million square feet in Q1, according to CBRE. Sublease space made up 19% of total available space at the end of the first quarter, up from 13% in Q1 2020.
Unsurprisingly, office-construction activity has tapered off significantly thanks to myriad factors, including weak demand for space, higher costs of capital and supply-chain and labor costs. There was 79 million square feet of office space underway in Q1, the lowest point since 2014, Cushman found.
Only 2.3 million square feet of office space broke ground in Q1, JLL says. About half of the office space under construction at the end of Q1 — 89.9 million square feet by JLL's measurement — was pre-leased.