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Negative Absorption, Higher Vacancy Highlight Q4 Office Numbers—Again

Amid continued uncertainties, it should be no surprise that multiple companies’ Q4 office market numbers provided a sense of déjà vu relative to previous quarters. Specifically, reports highlighted negative absorption and continued double-digit vacancies.

Plante Moran’s U.S. Office Real Estate Market Summary allowed that office rents recovered since the pandemic. But “outsized sublease availability has put downward pressure on growth,” the company’s analysts pointed out.

Despite the growth of U.S. employment, “corporate cost-cutting and structural changes in office usage have reduced space demand over the past several quarters,” said the researchers authoring CBRE’s U.S. Office Report.  Colliers’ U.S. Research Report/Office Market Outlook agreed, explaining that sublease space will be a more attractive lease option as businesses continue to assess their real estate strategies.

On the (kind of) positive side, net absorption was down in Q4, but not as dramatically as in previous quarters. Leasing activity is more robust among newer buildings (i.e., those that came online after 2010). Sublease space, which (as mentioned above) is a cause for concern, seems to be shrinking.  Cushman & Wakefield’s MarketBeat Report also indicated that new construction is slowing, as is tenant cost-cutting, leading to a slowdown in sublease inventory growth.

Despite the prospect of a soft economic landing and (as Colliers put it) “a growing sense of optimism that the U.S. economy is on a firmer footing than a year ago,” the outlook remains murky. Colliers anticipated that absorption would stay in the red as tenants continued their flight to quality. Additionally, as leases expire, tenants will consolidate their space. While there are signs that employees continue returning to the office, those same signs also suggest that the preferred method of work is the hybrid model. In a continued tight labor market, employees could continue to prevail.

Lee & Associates’ Q4 2023 Market Report introduced grimmer news, explaining that nearly half of office leases signed before the pandemic lockdown are unexpired. This means that the rate of vacant office space could increase by more than 3% by 2026. “With more than half of pre-2020 leases yet to roll and a steady stream of low-rate loans maturing into a high-rate environment, the office sector in most markets looks to be in for a protracted correction,” Lee & Associates analysts said.

As such, “we anticipate more pronounced performance gaps and variations in demand, particularly noticeable between trophy and non-trophy assets, but also within and between markets and various industry sectors,” Colliers analysts said.

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