Third quarter office leasing was the strongest it has been since before the pandemic as renewed optimism driven by improved return-to-office metrics has bolstered demand, especially for higher quality spaces. Continued RTO rates and solid overall economic growth point to a market that is on track for recovery.
This is according to Savills Research & Data Services’ Q3 state of the office market report, which found a higher proportion of leasing activity in suburban markets post-pandemic. The proportion of renewals relative to total leasing activity has increased as well, said the report.
Overall availability remains elevated as occupiers become more efficient with space utilization. Central business districts have availability of about 25.9%, up 1,210 basis points from pre-pandemic levels, indicating that dense urban centers remain heavily impacted. Suburban availability stands at 25.3%, up 620 basis points from before the pandemic. Tech-centric office markets are experiencing the largest increases in availability, led by San Francisco, Seattle and Austin.
Asking rents remained stable at $42.68 for the quarter compared with $42.78 during the second quarter and $42.20 a year ago. Many owners continue to offer concessions rather than drop rents, according to the report.
Markets remain bifurcated with stronger demand for well-located, high-end products outperforming less, expensive, lower quality and more dated spaces. Flight to quality and active construction pipelines in some markets have contributed to stabilization and increases in Class A rents as the Trophy Class A segment sees major premiums over non-trophy Class A space.
Available sublease space trended down for the fourth consecutive quarter to 164.7 million square feet. That compares with 165.6 million square feet during the second quarter and 176.4 million square feet during the third quarter last year. Sublease space was most pronounced in tech-centric markets, led by San Jose, Tampa and San Francisco.
Office inventory is beginning to shrink in some markets as conversions and redevelopment of dated office inventory accelerate. Baltimore, Phoenix and suburban Chicago markets led this trend. However, most markets continue to see growing office inventory, especially in the Sun Belt and Texas. Office inventory grew 10.4% in Nashville, for example.
Investment sales activity has slowed considerably in the office sector, according to the report. Total office investment sales activity year to date is up 12% to $41.7 billion but that remains down 57% from the same period in 2022. In addition, office cap rates have increased to 7.3%, up from 6.8% before the pandemic. At the same time, office property valuations have decreased, but declines have slowed.