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he U.S. office market is beginning to show signs of recovery, according to CBRE's Q2 2024 report. This quarter saw the first period of positive net absorption since Q3 2022, with 2.4 million square feet absorbed, indicating a resurgence in demand. Despite this, the vacancy rate edged up slightly by 10 basis points to 19.1%, primarily due to new completions outpacing the current demand.
Prime office spaces continue to outperform the broader market, maintaining positive net absorption. Since Q1 2020, prime buildings have seen a cumulative net absorption of 49.3 million square feet, in stark contrast to the negative 170.3 million square feet in non-prime buildings. The vacancy rate for prime office buildings stands at 15.5%, significantly lower than the overall U.S. average.
Leasing activity has also shown improvement, with a 13.6% increase from the previous quarter, totaling 47.9 million square feet. Renewals have surged, accounting for 45% of leasing activity, as tenants look to avoid build-out costs and renegotiate rental rates. However, overall leasing volume remains 19% below pre-pandemic levels, despite a 15% increase in the number of leases signed.
Sublease availability has decreased, with available space falling to 4.2% of total inventory, down from 4.7% a year ago. The total available sublease space now stands at 175 million square feet, 11% below its peak in Q2 2023. This decrease is a positive sign, as high sublease availability has been a significant drag on the market.
The development pipeline is thinning, with only 33.8 million square feet under construction—the lowest level since Q1 2020. This contraction in new supply should benefit markets with high vacancy rates by limiting future increases in vacancy. However, it also means that finding prime office space will become more challenging in the coming years, with completions expected to drop significantly by 2025.
The employment landscape in office-using sectors presents mixed signals. While job growth in professional and business services has stalled, gains in the financial activities sector have provided some balance. The correlation between employment and space demand has loosened, with the average office space per employee stabilizing at around 147 square feet, down 9% from pre-pandemic levels.
For commercial real estate investors, these trends suggest a cautiously optimistic outlook for the office market. The increase in leasing activity and the reduction in sublease space indicate a stabilizing market, while the ongoing reduction in new supply could create opportunities for existing prime office spaces. However, the overall high vacancy rate and the evolving nature of office space demand require a nuanced approach to investment and leasing strategies.
For a detailed analysis, refer to the full CBRE report by clicking on the button below:
