Dive brief:
- The US office real estate sector is now in three markets, each performing differently, but the overall office vacancy rate is forecast to peak at 21.6% in the second half of 2025 Cushman & Wakefield mid-year macroeconomics for commercial real estate. released in June.
- At the top end of the market, 30% of Class A office buildings are fully occupied and another 20% have vacancy rates below 15%, he says. The bottom 10%, on the other hand, are “highly challenged and likely outdated buildings” that contribute disproportionately to overall vacancy rates.
- The report also provided an outlook for industrial, multi-family, commercial and residential properties.
Diving knowledge:
The office market is still adjusting to the shift to hybrid working, with companies reducing their space needs and a significant portion of sublease space expiring in 2028 or later, the report says.
A decrease of 63 million square feet in the office sector is expected this year and Declining 7 million square feet in 2025. After the vacancy peak in late 2025, demand for office space is seen stabilizing to an average of 20 to 25 million square feet per year in the latter part of ‘this decade and a slowdown in the construction of new office space.
In the industrial sector, rapid construction of industrial facilities during the COVID-19 pandemic will weigh on demand through 2024 and the first half of 2025, leading to a projected peak vacancy of 6.7% in early 2025, the report states. Cushman & Wakefield expects vacancy rates to approach 5% by the end of its five-year forecast period. Rent growth in the industrial sector has been very strong, registering a 54% increase since the fourth quarter of 2019, the report notes. However, rental growth is expected to moderate, with expected increases of 3% in 2024 and 2% next year.
Against this background, industrial tenants are taking their time to finalize leases, Charlotte Elstob, managing director of industrial occupier services at JLL, said Facilities Dive, while discussing the conclusions of JLL’s fourth quarter 2023 industrial outlook. The report also sets out expectations that rental rate growth will continue at a moderate pace, with potential for near-term recovery as tenants occupy pre-leased properties.
The absorption of industrial space will hit a low of just over 100 million square feet in 2024 before roughly doubling next year, the Cushman & Wakefield report says. A more normal rate of demand is expected to return to the industrial sector by 2026, the report said.
In the retail sector, outdoor mall vacancy rates, currently at “an all-time low of 5.4%,” could rise by a marginal 40 basis points over the next two years, the report predicts. The sector is experiencing a diversified tenant mix and robust demand for retail space, in part due to a strong pipeline of store openings by major retailers, the report said, pointing to approximately 850 openings of more stores expected than closings this year.
With less than 12 million square feet of commercial space under construction and more than 4.3 billion square feet of inventory, high-quality locations will remain in short supply, according to the report. New supply isn’t expected to rise to its 2010-2019 average until at least 2027, he says, noting that well-located mall owners will continue to see rent-boosting effects.
