Demand levels off after steep drop in 2022 and 2023.
The start of the Covid pandemic is now more than four years in our rearview mirror. From a commercial real estate perspective, no sector was more negatively impacted than the office market. Through the second half of 2024, the US office market is down nearly 6.3 percent (or 297 million square feet) in terms of occupied, direct leased space, compared to pre-Covid levels. Additionally, there is another 130.7 million square feet of vacant available sublease space. After this much carnage, is the office market at the bottom of this cycle?
There is evidence that the market is beginning to level. While net absorption has been negative for 16 of the past 17 quarters, the amount of negative absorption in the most recent quarter was at its second lowest level since the start of 2020. Further, the amount of available sublet space has decreased for four straight quarters, while overall new supply is dwindling, with new office construction starts at historic lows. However, according to lease data available through CoStar and Cresa, leases signed before the start of 2020 are just over halfway through rolling.
The biggest driver of decreased office demand is remote work. Many companies have instituted different scenarios for addressing hybrid and/or remote work. With approximately two plus years since many workers returned to the new normal, return-to-the-office has generally been baked into many organization’s space planning. These levels are somewhere between 60 and 80 percent of pre-Covid levels. With three to four more years of pre-Covid signed leases slated to roll, it’s likely additional office space will continue to be shed. However, with many companies having a clearer picture of office space needs and several years of post-Covid signed office leases, the stabilization of the office market appears to be taking hold. With little new supply being delivered and underutilized office space being converted to other uses, a better balance of supply and demand will be reached. Nevertheless, there is more room for the office market to drop and office occupiers will have leverage for the foreseeable future.
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