Class A buildings are driving office absorption in many parts of the United States, particularly in the Sun Belt, and are helping stabilize the sector in the wake of COVID-19, according to the newest NAIOP Office Space Demand Forecast published by the NAIOP Research Foundation.
Office vacancy rates continued to tick up for the tenth straight quarter, but NAIOP analysts posit that the completion of new buildings may be partly to blame. The organization projects that absorption of that space will continue to be positive.
Overall net office space absorption in the last three quarters of this year is predicted to clock in just shy of 47 million square feet, a figure that's basically unchanged from previous forecasts. Total net absorption in 2023 is forecast to be 47.3 million square feet, with an additional 6.5 million square feet absorbed in the first quarter of 2024.
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The report also notes that suburban markets and life sciences hubs are faring better than the national average. Occupancy across the 10 U.S. cities tracked by Kastle Systems reached 43.4% on April 27, a new record since the pandemic's onset.
Office vacancy hit 18.1% in the first quarter, 40 bps below its pandemic peak in Q2 2021, but Moody's notes that vacancy rates are still increasing in so-called "superstar cities" like New York and San Francisco despite a recovery in utilization rates.
Leasing activity is also up year over year, "which signals that firms are more comfortable making longer-term commitments to office space," NAIOP analysts note. They say owners have been more willing to offer greater tenant improvements to encourage signing, "indicating that tenants still have the upper hand in lease negotiations" and signaling a move toward a more stable equilibrium.
"We are fortunately seeing that even as the work week gets reshuffled, and fewer employees are in the office at one time, companies still seek spaces for collaboration and for all employees to be at the office at least part of the week," said Thomas J. Bisacquino, president and CEO of NAIOP. "This obviously bodes well for the office sector and for the overall commercial real estate industry."
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