Has the Office Market Reached a Pivot Point?

The office market news has been stubbornly the same for multiple quarters: limited absorption, higher vacancies, and stagnant rent growth. The news from Q3 2024 office market reports suggests that rents aren’t budging all that much. But absorption is finally starting to pick up. Two of the four reports posted positive absorption in the quarter, while all pointed to a shrinking construction pipeline.

This means that “the U.S. office market appears to be on the verge of recovery as increased leasing demand over the past 12 months and limited new building completions began to positively impact fundamentals,” according to Colliers’ U.S. Office Market Statistics 24Q3.

Vacancy and Absorption

All reports agreed that vacancy rates in Q3 were at their lowest since the Great Recession (per Colliers). Colliers and the Lee & Associates’ Q3 North American Markets Report also indicated that, by their numbers, absorption turned positive during the third quarter.

At the opposite end, Cushman & Wakefield’s MarketBeat Office Q3 2024 and JLL’s U.S. Office Dynamics for Q3 indicated that absorption numbers were negative. However, both reports also stated that while in the red, those absorption numbers were higher than in previous quarters. “Over half of U.S. office markets (48 of 93) had better absorption numbers this quarter than a year ago,” the Cushman & Wakefield analysts noted. “A similar number of markets saw absorption improve QoQ.”

Furthermore, despite ongoing hybrid arrangements, “office attendance rates reached a post-pandemic record in Q3 2024, and large employers continue to progress policies, with some indications that executive sentiment is shifting in favor of office use,” JLL analysts said.

Then, There’s Construction

Another significant trend reported was the continual shrinkage of the office construction pipeline. The Cushman & Wakefield report noted that the construction pipeline has been at its lowest since 2012. According to Lee & Associates, construction starts haven’t been this low since 2013, “with starts in the past year the lowest on record.”

JLL analysts agreed, pointing to a falling total availability rate because of fewer groundbreakings and more inventory removals for conversions or other purposes.

But tenants still prefer high-quality buildings versus the older, Class B and C stock. Cushman & Wakefield analysts pointed out that office occupancy in such buildings—especially those in gateway cities—was nearly 800 basis points above the overall office average. Lee & Associates analysts added that top-tier buildings are in demand, while “demand in suburban and secondary markets also fares comparatively better.”

However, these tenants could face problems as fewer new buildings are delivered.

The Outlook

The outlook is that construction will continue to shrink. Fewer newer buildings will be delivered. This means that “occupiers will have considerably fewer new options to consider, as deliveries in 2026 and 2027 are expected to be less than one-fourth of the recent averages,” the Cushman & Wakefield analysts commented.

JLL analysts agreed, adding that the construction slowdown will likely be lengthy as more is allocated to other property types. However, “fully committed projects or developments in extremely strong micromarkets may see progress earlier if financial projections are particularly compelling,” the JLL analysts said.

The Lee & Associates experts also commented that much of the currently leased space has yet to roll over, meaning that “the full force of post-pandemic occupancy strategies has yet to filter through the market.”  This is likely to happen over the next two to three years, possibly leading to additional occupancy losses, Lee & Associates analysts said.