Momentum in the office segment continues to build, with the first positive post-pandemic absorption in the second quarter of 2024 followed by the levels increasing during the final six months of the year.
Particularly, the category was 11.4 million square feet in the second quarter, 26 million square feet in the third quarter and 29 million square feet in the fourth quarter, according to Marcus & Millichap national director of research and advisory services John Chang. This performance drove the national office vacancy rate down by 40 basis points (bps) to 16.7%. Vacancy reached a record high during the first quarter of 2024 at 17.1%, up from 12.2% at the end of 2019.
“I believe the momentum will carry through 2025,” predicted Chang. “More and more companies are instituting back-to-work policies ranging from requiring employees to be in the office five days a week – like Amazon and numerous financial institutions – to more stringently enforced hybrid policies. Yes, many companies still offer broad flexibility, and some have shifted to full-time remote work for all employees, but the trend has shifted and is showing up in the office-based demand metrics.”
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Chang noted the performance of office assets is important not only to real estate investors but also to other properties because where people work influences where they live, shop and participate in activities.
Not all office properties are experiencing the same type of turnaround, he said. While office vacancy in central business districts in primary markets has dropped 50 bps over the past three quarters, vacancy in suburban, secondary markets has only fallen by 20 basis points. And the Class A vacancy rate dropped by 60 bps, while the combined Class B and C vacancy rate has dropped by only 30 bps, said Chang.
Nevertheless, the fact that vacancies have fallen in both the suburbs and downtown areas in both major gateway and tertiary markets is a positive sign that momentum has shifted, he said. In fact, six metros have a lower vacancy rate today than they did before the pandemic, including West Palm Beach, Florida, New Haven/Fairfield, Connecticut and Riverside/San Bernardino, California. Miami’s vacancy rate is the lowest in the country at just 8.1%, 60 bps below its pre-pandemic level. Charleston, South Carolina’s vacancy rate is down 80 bps and the Las Vegas office vacancy rate is 180 bps below its 2019 level.
“We are beginning to see green shoots of recovery and for investors that may present a significant opportunity,” said Chang. “I'm not suggesting everyone jump into office property investment. This is definitely a property class where knowledge, experience and relationships in the industry matter a lot, and financing office properties is still challenging.”
On average, office property cap rates have increased by about 120 bps in the last couple of years to the 8% range, with many assets offering yields even higher than that, said Chang. The combination of higher yields with what appears to be a changing performance climate may offer investors a higher return opportunity. And investors can also look to office performance as a signal of changing local migration patterns that will influence the demand for housing, retail, self-storage and hotels.
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
