Office leasing activity has increased for the third quarter, with gains across all regions and market sizes. Eastern and gateway markets had particularly strong improvements, according to Newmark’s third-quarter office leasing report.
Higher-quality buildings captured a larger share of office leasing activity during the third quarter, accounting for about half of the market during the third quarter while representing only 33.6% of inventory. Class A buildings saw the strongest leasing growth during the three months.
Also driving leasing activity were large-block offices, although leasing in this category remains below pre-pandemic averages. The finance, insurance and real estate (FIRE) sectors recorded a notable increase in leasing share during the first three quarters of 2024, and the technology sector captured a similar share of total activity as last year.
While increasing, leasing activity has slowed compared with gains seen in 2022. Southern and secondary/tertiary markets have outperformed, the Central region and major markets have lagged, and Western and gateway markets have experienced the largest relative declines in activity compared with pre-pandemic levels.
Sublease activity fell 8.2% year-over-year but remains historically high, particularly in Western and Eastern markets as well as gateway and major markets. Much of the sublease inventory is converting to direct availability and vacancy. A reduction in sublease availability is necessary for new market expansion, said Newmark.
The San Francisco Peninsula, Philadelphia and Phoenix had particularly high sublease availability during the quarter. Further increases in sublease activity could happen in these markets as instability in the tech industry resulting in layoffs could soften market fundamentals.
The office market recorded its 18th straight quarter of negative net absorption at -284 million square feet, but there are hopeful signs as half of the 60 markets tracked by Newmark showed quarter-over-quarter improvements in the category. These gains were geographically diverse and primarily concentrated in secondary markets, with the South leading the country in occupancy recovery as all other regions remain negative for net absorption.
Since it peaked at over 122 million square feet in late 2019, office construction has continued to decline and pessimism during Q3 has discouraged new groundbreakings. This should curb vacancy growth as much of the post-pandemic supply remains unleashed, said Newmark.