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Q1 2024 Office: High Vacancies With a Tiny Dose of Optimism
The real estate companies released their Q1 2024 office numbers. On the surface, little has changed from previous quarters.
“Weak demand across most markets pushed the national office vacancy rate,” reported Colliers’ U.S. Market Statistics. Demand recovery continues, but occupancy losses persist as office users evolve,” the JLL U.S. Office Market Dynamics report added. The Lee & Associates Q1 2024 Market Reports indicated that corporate cost-cutting has meant that “underutilized office space has been viewed as an opportunity for savings.”
But delving a little further into the reports unveiled nuances to the numbers. Cushman & Wakefield’s Marketbeat pointed out that higher-quality office buildings perform better: “Class A vacancy declined QoQ in 32 of the 93 markets tracked by Cushman & Wakefield.” JLL analysts agreed that newer and differentiated properties “continue to outperform in occupancy and rents.”
Another interesting observation from JLL was that “the share of landlords seeing their vacancy rise today is not much different than the years leading up to the pandemic.” However, these buildings are experiencing faster vacancy increases. Still, this is concentrated in “buildings that are strong candidates for conversion or redevelopment,” the JLL analysts commented.
Adding to this is an ever-shrinking construction pipeline, which will influence the outlook. Cushman & Wakefield analysts explained that new office product will continue to outperform in the coming quarters and years. “With little construction in the pipeline, look for demand to spill over to the next-highest quality tier,” they added.
The Cushman & Wakefield report anticipated continued office softness in the near term, resulting from continued higher interest rates and ongoing shifts to hybrid and remote work strategies. However, “look for absorption to turn positive as office-using employment re-accelerates and the assumed interest rate cuts later in 2024 begin to work their way through the economy,” the Cushman & Wakefield analysts said.
Meanwhile, the JLL experts believe leasing volume is forecast to outpace 2023. On the other hand. “many of the leases signed today still reflect downsizing footprints, with the rate of downsizing only gradually declining,” JLL said, adding that this could mean continued occupancy losses in 2025.
Additionally, the Lee & Associates analysts caution that debt maturities will continue challenging in 2024 and 2025. “With delinquency rates at 7.4%, there is a possibility that next year, the dunning will exceed the 10.5% delinquency rates reached following the 2008 recession,” the analysts noted.
- ◦Lease
- ◦Economy
