Amid ongoing uncertainties, it is not surprising that the Q4 office market numbers for multiple companies have a sense of familiarity compared to previous quarters. Reports continue to show negative absorption and double-digit vacancy rates.
According to Plante Moran’s U.S. Office Real Estate Market Summary, office rents have recovered since the pandemic but are facing downward pressure due to an abundance of sublease availability. CBRE’s U.S. Office Report also acknowledges this trend, attributing it to corporate cost-cutting and changes in office usage.
While there has been growth in employment across the United States, Colliers’ U.S Research Report/Office Market Outlook notes that demand for space has decreased due to cost-cutting measures and shifts in real estate strategies among businesses. As a result, sublease space is becoming a more attractive option for tenants.
On a slightly positive note, net absorption was down in Q4 but not as significantly as previous quarters. Leasing activity remains strong among newer buildings constructed after 2010 while sublease space appears to be decreasing (despite being cause for concern). Cushman & Wakefield’s MarketBeat Report also indicates slower new construction and tenant cost-cutting measures leading towards less growth in sublease inventory.
Despite some signs of economic improvement and growing optimism about the state of the economy compared with last year (as noted by Colliers), there is still uncertainty surrounding future trends within the commercial real estate industry . The report predicts continued negative absorption as tenants seek higher quality spaces while consolidating their current leases upon expiration dates. Additionally , hybrid work models seem preferred by employees even though they are returning back into offices at increasing rates – which could lead them continuing having influence over lease decisions during tight labor markets .
In Lee & Associates’ Q4 2023 Market Report , analysts share grimmer news stating almost half of pre-pandemic lockdown signed leases remain unexpired . This means vacant office spaces could increase by over 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 prolonged correction,” said Lee & Associates analysts.
As such, Colliers’ analysts anticipate significant performance gaps and variations in demand among trophy and non-trophy assets as well as within different markets and industry sectors.
