Q4 2023 U.S. Office Real Estate Market Report
The office real estate market remains subdued as industry players across the country settle in for an extended down period of demand. Overall leasing volume has trended downward for four consecutive quarters. Accounting for both structural changes in demand and the likelihood of slower job growth in the coming year, the forecast calls for another 25 million square feet (SF) of negative absorption in the remainder of this year. This would make 2023 by far the worst year for net absorption on record, pushing vacancy near 14% by the end of the year and on its way to a peak of around 17.5% by the end of 2026.
There is resiliency at the top of the market, including five-star and new construction completed within the past 36 months, where rent growth has remained positive.
National office real estate trends
- Tenants vacated another 15 million SF more than they occupied in Q3 2023, bringing 12-month net absorption to negative 69.8 million.
- About 206 million SF of sublease space is available on the market, a rise of more than 100% since the end of 2019 and well above its previous peak during the Great Recession.
Landlords and owners are continuing to grant longer periods of free rent and higher tenant improvement packages.
- Over 55 million SF in new office inventory was completed in 2023 with about 15 million SF in obsolete stock being demolished or converted. The resulting 40 million SF in net deliveries was the lowest amount since 2014, though the expected 56 million in 2024 would be the second-most over the same period. With demand still faltering, new supply should exacerbate vacancy in the near term.
- Construction starts on office buildings are now slowing further, due in part to a difficult lending environment.
- The office sector’s challenges continue, with increasing vacancies, heightened tenant improvement costs, and waning rent growth tempering investor interest.
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