Market Observations
- Labor Markets: We estimate that new office-using jobs have added 240.5 million SF of office demand since February 2020, helping to soften the blow of the hybrid work office demand shock. More jobs are needed for office markets to recover. Office-using job growth is expanding at a moderate pace and has been under-performing overall employment growth since 2023. Information (tech) employment has been the primary source of weakness. Across the top 50 office markets, office-using employment expanded in 27 markets and accelerated in 36 markets in the last six months.
- Hybrid Work Transition: Slowing job growth leaves markets more exposed to the ongoing demand adjustment to hybrid work. Newmark estimates that 57% of pre-pandemic leases have yet to come up for renewal, including 1.9 billion SF of renewals in the 2024-to-2027 period. Average lease size has declined by 13.4% compared with pre-pandemic, suggesting further reductions in overall office demand.
- National Trends: Leasing activity remained sluggish in most markets in the second quarter of 2024, decelerating nationally to an estimated 0.8% of inventory, compared with the quarterly average of 1.4% realized between 2012 and 2019. Occupancy levels continued to post losses in the second quarter of 2024; however, net absorption improved quarter-over-quarter to negative 6.0 million SF from negative 18.7 million SF from the first quarter of 2024. Though most markets recorded occupancy declines, 33 out of 60 markets tracked by Newmark saw improvements to net absorption compared with the trailing 12-month average. National vacancy rose just 10 bps to 20.3% in response to a decelerating construction pipeline, which totaled 43.2 million SF, a decline of nearly 6.0 million SF from the first quarter of 2024.
- Regional Trends: All regions posted occupancy declines in the second quarter of 2024, led by the East Region, where occupancy declined by negative 4.0 million SF. While leasing activity has broadly continued to slow, net absorption is on an upward trend across regions. Net absorption has been consistently strongest (though still negative) in the South. Gateway markets shed most space in the second quarter of 2024, led by New York, Los Angeles, and Washington DC. Smaller, secondary markets captured nearly all positive net absorption in second quarter of 2024—highlights include Columbus (+710,000 SF), Nashville (+703,000 SF), and Baltimore (+613,000 SF).
- Rent Trends: Asking rents increased 0.8% year-over-year in the second quarter of 2024, led by major markets (+6.1% YoY) and western markets (+2.8%). Concessions packages remain significantly higher than they were pre-pandemic pushing down effective rents. TI allowances are 63.2% higher than they were pre-pandemic on average, based on an analysis of leading office markets.
- Class Conundrum: Class performance is more nuanced than the dominant flight-to-quality narrative suggests. In CBD markets, higher quality office has outperformed since the first quarter of 2020. Class A office has modestly lower availability rates compared with Class B, while post-2019 Class A construction has materially lower availability. Asking rent growth, meanwhile, has been comparable for Class A and B, and new construction has in fact underperformed. On a combined basis, new construction has handily beat both Class A and B product, though this is partly due to much of the new product being in lease-up. Non-CBD property fundamentals have broadly outperformed CBD markets. Contrary to common belief, Class B suburban product has consistently had lower availability than Class A product in either CBD or non-CBD markets. Class B product has similar availability as CBD new construction, which is materially lower than Non-CBD new construction. Asking rent growth has been robust across non-CBD market segments with the strongest growth in Class A properties. On a rent per available foot basis, non-CBD Class B buildings have outperformed all other segments except for CBD new construction.
