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Office Leasing Activity Expected to Continue Upward Climb Into Next Year

More office leases are being signed today than before the pandemic, and leasing activity is expected to increase later this year and into 2025 as occupiers gain confidence in making real estate decisions amid a resilient economy.

Occupiers signed 3,166 office leases during the first half of this year, which compares with an average of 3,136 during the first half of 2018 and 2019, according to CBRE's first-half office leasing data. However, the average lease size dropped 27% compared with pre-pandemic lease sizes, a trend CBRE attributed to economic uncertainty and structurally lower demand due to hybrid work.

As office leases tick up, driven by the legal, technology and finance sectors, occupiers are favoring renewals over relocations. Renewals accounted for 42% of office lease transactions during the first half compared with 31% before the pandemic. The average lease size for renewals fell by 21%, said CBRE.

For occupiers that are moving, 59% are considering relocating to a higher-quality space. Prime buildings have drawn 12% of total leasing volume since 2021 despite only making up 8% of total U.S. office inventory. While the average lease size on new deals has decreased 32% compared with pre-pandemic averages, occupiers in prime buildings are signing leases with longer terms, averaging 107 months between 2021 and 2024 compared with 86 months for non-prime buildings.

In gateway markets, where leasing activity has been sluggish, prime buildings accounted for a relatively high share of total volume since 2021, particularly in Philadelphia (26%), San Francisco (23%), Dallas-Ft. Worth (20%), Seattle (19%) and Atlanta (18%), according to CBRE.

The higher share of lease renewals coupled with less downsizing signals that occupiers are cautiously leveraging existing landlord relationships while adapting to new work patterns, said CBRE. Tenants in non-prime buildings have leveraged the higher availability of space to negotiate more flexible terms and concessions.

More than 92% of occupiers with more than 10,000 employees were considering executing a lease renewal while less than half of small occupiers with fewer than 1,000 employees were considering a lease renewal. Large occupiers tend to be more successful in renewal negotiations because landlords are motivated to avoid a sizable vacancy, said CBRE.

Leasing activity should increase later this year and in 2025 as more tenants look for space in major markets in anticipation of lower interest rates and greater clarity around office utilization, the firm said.

Reprinted with permission from the Thursday, 19 September 2024 05:35:58 EST online edition of GlobeSt © 2024 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.