Market Observations
- Labor Markets: Since February 2020, new office-using jobs have generated an estimated 246.1 million SF of office demand, partially offsetting the impact of hybrid work on overall demand. However, sustained job growth is crucial for a full recovery in office markets. While office-using employment continues to expand, it has lagged behind overall employment growth since 2023, largely due to underperformance in the tech sector. Among the top 50 office markets, 19 recorded increases in office-using employment over the past six months, with 16 of these markets showing faster job growth compared to the previous six-month period.
- Hybrid Work Transition: Slower job growth heightens the vulnerability of office markets to demand shifts driven by hybrid work. Newmark estimates that 49% of pre-pandemic leases remain unrenewed, including 1.4 billion SF scheduled for renewal between 2025 and 2027. Additionally, the average lease size has contracted by 11.0% compared to pre-pandemic levels, indicating potential further reductions in office demand. However, Newmark’s tenants in the market data suggest that 80% of tenants are not planning to reduce their footprints upon their upcoming lease expiry. Accordingly, the outlook is at once less dire but also suggests a slow pace of recovery.
- National Trends: After 18 consecutive quarters of net losses, national office occupancy posted a +5.3 million SF improvement in the fourth quarter of 2024, with 37 of 60 tracked markets experiencing quarter-over-quarter gains in net absorption. Leasing activity increased in approximately half of the tracked markets, with national leasing accelerating to 1.1% of inventory, up slightly from the prior year’s quarterly average of 1.0%. National vacancy held relatively steady quarter-over-quarter but increased 80 basis points year-over-year to 20.3%. The construction pipeline contracted to 33.7 million SF—down more than 21.8 million SF from the fourth quarter of 2023. The trophy segment of the market is set to become tighter and tighter, which should support rent growth first in trophy and then potentially in the next tier of building quality and location.
- Regional Trends: The East and West regions led the occupancy gains in the fourth quarter of 2024, with standout improvements in New York City (+1.8 MSF), Washington, D.C. (+1.6 MSF), and Silicon Valley (+796,787 SF). Conversely, the Central and South regions recorded a combined net loss of 1.1 MSF during the quarter. With leasing activity on the rise—particularly within higher-tier properties—net absorption trends are improving across most regions and market sizes. The South region accounts for 40% of the under-construction inventory, with much of this product slated for completion by the end of 2025.
- Rent Trends: Asking rents rose 0.8% year-over-year in the fourth quarter of 2024, with notable gains in major markets (+2.4% YoY) and Central markets (+1.9%). However, elevated concessions continue to weigh on effective rents. Tenant improvement (TI) allowances now average 66.7% higher than pre-pandemic levels across leading office markets. One interpretation of flat nominal rents is that a portion of the market adjustment has been achieve via inflation. PPI-deflated office rents are down 5.3% since 4Q18.
- Class Conundrum: Class performance remains more complex than the commonly cited flight-to-quality narrative suggests. In CBD markets, higher-quality office product has driven performance since the first quarter of 2020. Availability rates for Class A offices align closely with those of Class B, though post-2019 Class A developments have significantly lower availability. Class B asking rents have shown notable growth since early 2020, while Class A rents have stayed relatively stable, with post-2019 construction rents falling in between. Outside CBDs, non-CBD properties have generally outperformed their CBD counterparts. Surprisingly, Class B suburban properties have maintained lower availability than Class A properties in both CBD and non-CBD areas. Availability rates for Class B properties are on par with new CBD construction and significantly lower than new non-CBD construction. Non-CBD segments have experienced robust asking rent growth, with Class A properties leading gains. On a rent-per-available-foot basis, CBD post-2019 construction continues to outperform all other segments.
