Intelligent Investment

10 Signs of U.S. Office Market Stabilization

December 5, 2024 3 Minute Read

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Increasing tenant requirements, positive demand for space and a reduction in new supply indicate that the U.S. office market is finally stabilizing after its pandemic-induced downturn. The following 10 metrics collectively support this conclusion and indicate that an office market recovery is likely to begin late next year.

Increasing Tenant Requirements

  1. Solid Pipeline of Active Tenants

    CBRE’s Tenants in the Market (TIM) Index for the 11 largest U.S. office markets was stable in the high 80s over recent months and was up by 10 points from a year ago.

    Manhattan, San Francisco, Los Angeles and Boston had TIM levels above their pre-pandemic averages in Q3 2024. The strong tenant pipeline is an indicator of increased leasing activity over the next several months.

  2. Return-to-Office & Space-per-Worker Levels Plateau

    CBRE’s 2024 Americas Office Occupier Sentiment Survey indicates that average office utilization has largely plateaued, with 64% of respondents reporting that their office usage has reached a steady state. Another 34% expect utilization to increase, driven mostly by larger companies mandating regular office attendance.

    Hybrid work has resulted in less space needed per worker. Following a steady decline due to hybrid work arrangements beginning in Q2 2020, space allocated per worker stabilized through most of 2024 at 146 sq. ft., just 9% less than the pre-pandemic average of 161 sq. ft.

  3. Portfolio Stabilization & Expansion

    Nearly 40% of respondents to CBRE’s Office Occupier Sentiment Survey said they may soon grow their office portfolios, up from only 20% of respondents in the previous year’s survey. Combined with the 25% of respondents who expect no change in portfolio size, it appears that office occupiers are less inclined to reduce their amount of office space than they were during the height of the pandemic. The sentiment toward expansion is strongest among relatively small companies—those with less than 1,000 employees—that will continue to drive leasing activity next year.

Improved Market Demand

  1. Net Absorption Stays Positive

    Net absorption has been positive for the past two quarters, accelerating to 4.3 million sq. ft. in Q3 from 2.3 million sq. ft. in Q2 and partially offsetting the 9.3 million sq. ft. of negative net absorption in Q1.

    Manhattan led all markets with 3.4 million sq. ft. of net absorption in Q3. Negative net absorption has eased from a year ago in several other gateway markets, including San Francisco, Boston, San Jose, Seattle and Washington D.C.

  2. Leasing Activity Increases

    Leasing activity has accelerated and exceeded its five-year average for the past two quarters. For the first three quarters of 2024, leasing activity increased by 4% year-over-year to 125.3 million sq. ft.

    While activity is still less than the 2018-2019 average, the number of leases signed over the past two years is higher. More than half of the leases signed so far this year have been for smaller spaces of between 10,000 and 20,000 sq. ft. and this trend is expected to continue next year.

  3. Average Lease Size Stabilizing

    Following a mostly downward trend over the past few years, the average size of leases for at least 10,000 sq. ft. increased for the second consecutive quarter to 29,875 sq. ft. While the average lease size is stabilizing, it remains 25% below the 2018 and 2019 average.

Supply & Demand Balance

  1. Vacancy Stabilizes

    Positive net absorption and fewer construction completions have kept the overall office vacancy rate stable at 19% for the past two quarters. More than one-quarter of U.S. office markets tracked by CBRE, including Manhattan, Nashville and Miami, have seen declining or stable vacancy rates over the past year. Vacancy rates likely have peaked and should begin to fall late next year.

  2. Sublease Availability Consistently Falls

    Sublease availability has been falling since Q3 2023. While still sizable at 4.1% of total office inventory, it is down from its recent peak of 4.7% in Q2 2023. The decline is due to both increased leasing activity and lease expirations.

  3. Drop in New Supply

    Total space under construction fell by 74% between Q1 2020 and Q3 2024 to 32 million sq. ft. Completions will total 23 million square feet this year, the lowest annual amount since 2013. The diminishing construction pipeline will reduce supply-side pressures on vacancy but make available space in prime buildings increasingly scarce.

    Completions are expected to fall to only 17 million sq. ft. in 2025.

  4. Demolition & Conversions Reduce Largely Vacant Office Buildings

    Demolitions and conversions of largely vacant office buildings are presenting opportunities for better uses of non-performing real estate assets. Office conversions have increased from an average of 45 annually between 2016 and 2023 to 73 so far in 2024 and another 30 scheduled for completion by year-end.

    As of Q3 2024, 71 million sq. ft. or 1.7% of total U.S. office inventory was planned for or already undergoing conversion. These projects are expected to increase over the next few years, especially as cities reduce regulations and offer more financial incentives.

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