Demand for high-quality office space is growing, office vacancy is falling and leasing activity is growing. Even available space to sublease is declining, according to a new report from CBRE for 4Q 2024.
“Demand for high-quality space in prime locations remained strong, while commodity buildings continue to draw limited tenant interest,” the report said. “The prime office vacancy rate fell by 10 bps quarter-over-quarter to 15.3%, while the non-prime vacancy rate stayed at 19.2%.... This reflects a strong preference for quality offices and building in well-connected, amenity-rich locations.”
However, some markets like Nashville, Raleigh and Seattle that had undergone recent delivery of speculative prime buildings did see a short-term increase in vacancy rates.
Prime vacancy rates were lowest in Miami and Midtown Manhattan. They were more than 10 bps less than overall office vacancy rates in San Francisco, Philadelphia and Charlotte.
“As prime space becomes increasingly scarce, demand likely will spill over to the next tier of buildings,” the report predicted.
Outperforming the broader market, net absorption in prime office space totaled 11.2 million square feet in 2024. Non-prime space suffered 4.6 million square feet of negative net absorption.
In 4Q 2024 alone, net absorption reached its highest quarterly total in three years at 10.3 million square feet – more than double that for the previous quarter – outpacing the delivery of 6.8 million new square feet in 4Q 2024. The overall vacancy rate fell by 10 bps quarter-over-quarter to 18.9%.
Net office absorption rose in 36 of the 57 markets CBRE tracks in Q4 compared to the prior year – even in those with negative demand. Gateway markets with a strong tech presence saw an increase in positive net absorption, including Manhattan, San Jose, San Francisco, Washington, DC and Dallas. Secondary markets that are tech hubs or in high-growth Sunbelt markets also benefited, including New Jersey, Nashville, Austin, Orlando and Salt Lake City.
The quarter also saw office leasing activity soar by 24% to 64 million square feet, up 23% year-over-year and the highest level in three years. Most gateway markets benefited, especially Manhattan where leasing leaped 27% to 9.3 million square feet in 4Q 2024. Other markets seeing spikes in leasing were Atlanta, Chicago, Boston, San Francisco, Washington, DC and Dallas.
The number of lease transactions also rose, “driven by greater consistency of hybrid work arrangements,” the report noted. Lease sizes were 12% lower than before the pandemic but 28% higher than at their lowest point during the pandemic.
“Renewals remained at a historically high share of overall leasing activity at 44% vs. a 31% average share in 2018 to 2019,” it added.
Sublease availability stayed well above pre-pandemic levels. However, it fell 16% below its peak in 3Q 2023. “This reduction is due both to new sublease activity and lease expirations,” the report commented.
To gauge the pace of the office recovery, CBRE created three indices. Its Leasing Activity index rose 10 points to 89 quarter-over-quarter, and 23 points year-over-year. Its index, which measures space requirements of Tenants in the Market, slipped seven points quarter-over-quarter to 83. Its Sublease Availability index fell by 12 points quarter-over-quarter and 30 points year-over-year to 227.
The U.S. office development pipeline continued to trend downward with only 24 million square feet under construction at year end. The highest levels were in Austin, Miami and Nashville, all of which could see a rise in vacancy when construction is completed. However, lower construction could make it harder for tenants to find prime space.
These shifts in office occupancy are happening at a time when office-using job growth is increasing by 0.4% year-over-year. Most large markets with rising employment experienced increased absorption in the fourth quarter.
“Continued economic growth and less uncertainty about work patterns should support future leasing activity,” the report concluded.