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The U.S. office market is recovering, entering a growth cycle after years of struggling with vacancies, according to JLL. Third quarter office market dynamics report.
Domestic office vacancy rates declined for the first time since the start of 2019, falling five basis points to 22.5% at the end of the third quarter, according to JLL. Leasing activity is at 82% of pre-pandemic levels.
Gross leasing volume grew 6.5% quarter-over-quarter to 52.4 million square feet, with 18 markets surpassing pre-pandemic leasing activity and seven markets returning to more than 90% of pre-pandemic levels.
The first decline in vacancies since 2019 is the result of stabilizing demand and expanding office space at a time when new development is minimal. “Office [markets] could be entering a prolonged period of declining vacancy rates,” says JLL.
Footprint adjustments for large expiring leases show the end of a pandemic-driven downsizing cycle, JLL says. According to the company, tenants with at least 25,000 square feet due have trimmed just 2.2% of their footprint when they signed a new lease over the past year.
Large-scale transaction activity has returned to the market, says JLL. Lease transactions over 100,000 square feet fell more than 40% in the second quarter, but large leases grew more than 50% in the third quarter, signaling a move toward recovery.
“Low volumes of large leases remain one of the most significant drivers of the gap between leasing over the past year and pre-pandemic norms,” JLL says, noting that large leases over the past year only reflect about two-thirds of pre-pandemic volume.
Asking rents grew slightly in the third quarter, but have remained largely stagnant since mid-2023. Overall, asking rents have softened due to declining availability of higher-quality space and relatively static availability of lower-quality segments.
But as Tier 1 and trophy stock become scarcer, with new supply declining in availability and second generation (2010-2014 construction) tightening from early 2024, lower Tier 2 rental rates continue to rise, growing by 2.1% last year, JLL says.
The appetite for office space, even older construction, coincides with post-pandemic highs in office attendance as flexible policies. continue to fade in favor of stricter assistance policies, says JLL. Continued changes have pushed most office workers at Fortune 100 companies back into the office full-time, with 56 percent of those companies requiring five days in October, the report said.
