Office recovery is in sight.
Office occupancy appears to be approaching the bottom, but signs are not showing a sharp increase in the overall health of the market. With availabilities stabilizing and net absorption slowing, demand has been flat for the past two quarters. Still, a recovery is complex as daily attendance slowly drifts higher, job creation has been diminishing additional demand. As the number of signed leases improves and aligns closer to historic averages, lease sizes have shrunk about 20 percent. Meanwhile, space consolidation is continuing with lower headcount growth driving space requirements. Supply has slowed to a trickle and space is being removed from the market as office conversions continue in many markets. With major employers like Amazon announcing stricter office attendance policies, occupiers may be more willing to hold onto space.
Office Tenant View:
- Job losses will cause many occupiers to eliminate excess space, providing additional bad news for landlords.
- With office attendance rising only gradually and job growth stagnant, a dramatic change in demand conditions in the next 18-24 months is unlikely.
- Values for multi-tenant, investment-grade buildings targeting traditional office tenants have fallen sharply from their peak and are likely to dip further as more liquidity leads to a final round of price discovery.
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