Market Observations
- Labor Markets: Since February 2020, we estimate that new office-using jobs have added 243.2 million SF of office demand, helping to ease the impact of hybrid work on office demand. However, further job growth is necessary for a full recovery in office markets. While office-using job growth is expanding at a steady pace, it has lagged behind overall employment growth since 2023, primarily due to underperformance in the tech sector. Among the top 50 office markets, office-using employment rose in 35 markets over the last six months, with 32 of these markets experiencing accelerated job growth compared to the previous six-month period.
- Hybrid Work Transition: Slowing job growth leaves markets more vulnerable to the ongoing demand shift driven by hybrid work. Newmark estimates that 49% of pre-pandemic leases remain unrenewed, including 1.4 billion SF slated for renewal between 2025 and 2027. Additionally, the average lease size has decreased by 13.5% compared to pre-pandemic levels, indicating further potential reductions in overall office demand.
- National Trends: Leasing activity increased in most markets in the third quarter of 2024, accelerating nationally to an estimated 1.0% of inventory, up from the prior year’s quarterly average of 0.9%. While occupancy levels declined in the third quarter, net absorption improved significantly over the year, reaching negative 3.2 million SF—an improvement of 15.5 million SF since the first quarter of 2024. Despite occupancy declines in most markets, 30 of the 60 markets tracked by Newmark saw net absorption gains compared to the trailing 12-month average. National vacancy rose by 100 basis points to 20.4% year-over-year, reflecting a slowing construction pipeline totaling 38.7 million SF—a decline of more than 19.5 million SF from the third quarter of 2023.
- Regional Trends: Net absorption has consistently been strongest in the South. The South Region was, in fact, the only region to record occupancy gains in the third quarter of 2024, driven by notable successes such as a high volume of preleased new construction delivered in Dallas. In contrast, the Central, East, and West regions posted negative net absorption, with the East and West shedding comparable occupancy volumes. With leasing activity on the rise, net absorption is trending upward across regions. Secondary and tertiary markets accounted for nearly all positive net absorption in the third quarter of 2024, with standout gains in Dallas (+1.3 MSF), Northern New Jersey (+612,496 SF), and Columbia, SC (+526,085 SF).
- Rent Trends: Asking rents rose 0.8% year-over-year in the third quarter of 2024, with gains led by major markets (+1.6% YoY) and Central markets (+3.2%). However, concessions packages remain well above pre-pandemic levels, pushing effective rents lower. Tenant improvement (TI) allowances now average 65.6% higher than pre-pandemic, based on analysis of leading office markets.
- Class Conundrum: Class performance is more nuanced than the prevailing flight-to-quality narrative suggests. In CBD markets, higher-quality office has led performance since the first quarter of 2020. Availability rates for Class A office are on par with Class B, while post-2019 Class A developments show significantly lower availability. Notably, Class B asking rents have seen strong gains since early 2020, while Class A rents have remained relatively stable, and post-2019 construction falls in between. Non-CBD properties have generally outperformed CBD markets. Contrary to common assumptions, Class B suburban properties have maintained consistently lower availability than Class A in both CBD and non-CBD areas. Availability in Class B properties is comparable to that of new CBD construction and significantly lower than new non-CBD construction. Asking rent growth has been robust across non-CBD segments, with Class A properties showing the highest gains. On a rent-per-available-foot basis, CBD post-2019 construction has outperformed all other segments.
