Reports analyzing Q3 trends in the U.S. office space agreed on multiple factors, including declining vacancy rates, bifurcation and a dwindling construction pipeline. The Cushman & Wakefield MarketBeat report suggested that “The combination of improving demand and slowing new supply is helping stabilize the broader office market.”
JLL’s Market Dynamics write-up agreed, adding that “with footprints beginning to expand and little new development, office could be entering an extended period of declining vacancy rates.” CBRE’s Insights report also chimed in, noting that “the combination of improving demand and slowing new supply is helping stabilize the broader office market.”
However, the Lee & Associates North America Market Report sounded a note of caution, commenting that the softening job market is working against recovery.
“Government reports and revisions show payrolls 2% below their 2023 peak in the major so-called knowledge industries that include work in technology and information, life sciences, professional and financial services, advanced manufacturing, creative and media,” the report pointed out.
Class A Remains Popular
Newer trophy assets with amenities were at the forefront of office leases, and this trend continued into the third quarter.
“After years of portfolio rightsizing, companies are expanding footprints, especially in top-tier buildings,” Cushman & Wakefield analysts observed.
Renewals were also above pre-pandemic averages, according to CBRE experts. “Higher-than-average renewals could continue due to moving and construction costs,” they added.
Plante Moran’s Office Real Estate Market report agreed, noting that “Class A+ buildings continue to outperform.” The same could be said of geographic regions, as “leasing activity is showing resilience in top-tier markets where much of the hybrid-work-related downsizing has already taken place,” Plante Moran’s analysts pointed out.
But don’t count out Class B stock. “In markets where new supply has few larger blocks of availability, second-generation buildings are seeing more aggressive rent growth,” said JLL experts.
The CBRE report had a different take, noting that “generous tenant-improvement allowance and free rent periods continue to limit effective rent growth in Q3, especially for Class B/C Buildings.” Plante Moran’s write-up also noted that older and non-competitive buildings continue to face challenges.
In the meantime, some office buildings are disappearing. The Colliers Office Market Statistics write-up noted that “multiple vacant buildings were taken out of inventory in advance of conversion to another use.”
Slowing Supply Pipeline
The JLL report noted that, despite an overall improvement in fundamentals, “the pipeline continues to reflect an aggressive correction.” Colliers and Lee & Associates agreed, with the former noting that new development “remains constrained” and the latter pointing out that “supply growth is down to a trickle.”
Cushman & Wakefield experts said that a lack of supply will likely “support increased overall occupancy levels, helping existing assets lease up and further stabilizing the office market.”
Looking into The Future
JLL experts explained that Q3 demonstrated that “office tenants are largely shrugging off macroeconomic volatility.” A continued expansion trend combined with dwindling development and inventory removal is and will continue to push the market “in a more landlord-favorable direction, with that momentum likely to persist for at least three or four years,” the report pointed out.
Meanwhile, Cushman & Wakefield analysts said that flight to quality will be ongoing, and “as top-tier space fills and new deliveries remain low, demand will shift toward commodity Class A and well-located Class B buildings with strong amenities and transit access.”
Plante Moran focused on future supply, which is expected to remain low at least through 2029. Furthermore, “with job growth stalled and new supply scarce, national occupancy is unlikely to stabilize before late 2026,” the analysts said.
Additionally, high capital costs, a weakened demand in some key markets and minimal renovations “suggest a slow path to recovery,” they said.
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