Key Takeaways:
The U.S. economy is slowing but remains resilient, with real GDP dropping from 3.4% in Q4 2023 to 1.4% in Q1 2024 and performing better than expected in Q2 at 3% for Q2.
Office demand remained negative for the tenth consecutive quarter, with national absorption at -18.2 million square feet, though a third of U.S. markets saw positive absorption.
Office construction is declining, with deliveries 27% below the average since 2020 and the current pipeline at its lowest in over a decade.
High-quality buildings continue to outperform, with occupancy rates 750 bps higher than the overall office market.
In the first half of 2024, 17.7 million square feet (msf) of new office space was delivered in the 93 U.S. markets tracked by Cushman & Wakefield, 27% below the five-year average. Deliveries are projected to fall below 10 msf per year, less than a fourth of the 10-year average of 47 msf. The current national pipeline stands at 44.3 msf, the lowest since Q4 2012 and down 67% from the Q1 2020 peak of 135 msf.
Strong demand remains for new, high-quality spaces, but the shrinking pipeline suggests a potential underbuilding of desired inventory, which could help stabilize occupancy in existing buildings. Additionally, the increase in sublease space is slowing, with a 1.0% quarter-over-quarter rise reaching 153.4 msf in Q2, the slowest year-over-year increase since the Fed began raising interest rates in March 2022.
Economic Drivers:
The impact of hybrid work will continue to influence occupancy requirements over the next several years. However, office attendance peaks at 60-70% on Tuesdays, Wednesdays, and Thursdays, setting a baseline for the minimum office space needed.
U.S. office-using job growth has slowed dramatically, with 134,000 net new office jobs created in 2023, down from 1.1 million in 2022. Office-using job growth will remain somewhat muted in 2024 before picking up in 2025 as economic growth reaccelerates. Interest-sensitive sectors including credit intermediation and information (largely tech) are expected to remain under pressure despite the recent interest rate cut.
Long-term, office employment is projected to rise from 35 million now to 38 million by decade’s end. Job growth is expected to counterbalance the work-from-home trend starting late-2025. After six years of declines, office space net absorption is predicted to become positive in 2026.
Outlook:
Although office jobs will continue to grow, office demand is still adjusting to hybrid work. Experts believe the process is beyond what weighted average lease terms (WALTs) imply, as about half the space on the sublease market has an underlying expiration date in 2028 or beyond. Occupiers have pulled forward future downsizing.
Trifurcation remains a key theme. There are bright spots in the office sector, including that 30% of Class A buildings have no vacancy and another 20% have sub-15% vacancy. The bottom 10% account for over 730 basis points (bps) of current vacancy, reflecting a growing weight that these highly challenged and likely obsolete buildings have on headline statistics.
Sources:
https://www.bea.gov/data/gdp/gross-domestic-product
https://www.bea.gov/news/2024/gross-domestic-product-second-estimate-corporate-profits-preliminary-estimate-second
https://www.moodys.com/web/en/us/about/insights/data-stories/us-commercial-real-estate-vacancies-downtown-vs-suburbs.html
https://insights.cushmanwakefield.com/story/2024-us-midyear-outlook/page/1
https://www.cushmanwakefield.com/en/united-states/insights/us-marketbeats/us-office-marketbeat-reports
https://www.us.jll.com/content/dam/jll-com/documents/pdf/research/americas/us/jll-us-office-market-dynamics-q2-2024.pdf
https://www.cbre.com/insights/figures/q2-2024-us-office-figures
https://www.us.jll.com/en/trends-and-insights/research/office-research-snapshot-07-29-2024
https://www.us.jll.com/en/trends-and-insights/cities/how-real-estate-is-retrofitting-historic-buildings
https://www.wconline.com/articles/96587-commercial-construction-market-forecast-for-2024-25
