Positive net absorption, healthy leasing activity and relatively low levels of new supply all combined to keep the U.S. office market on a stable trajectory during the first quarter, according to CBRE’s Q1 office demand report.
The sector recorded the fourth straight quarter of positive demand with net absorption of 2.3 million square feet. However, that was substantially lower than the 10 million square feet posted during the fourth quarter, whose performance can be attributed to a high share of renewals, particularly among large occupiers, said CBRE.
Leasing activity reached 54 million square feet, an 18% year-over-year increase for the first quarter, keeping the sector above its five-year quarter average but just 3% below the pre-pandemic average for 2018-2019. Leasing performance was mixed in gateway markets, with volume increasing in Manhattan, Chicago, Los Angeles, San Francisco and Boston, while remaining flat in Atlanta and falling in Dallas, Seattle and Washington, D.C.
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Still impacted by hybrid work, the average lease size was 21% smaller than pre-pandemic levels but was 11% above the pandemic-era low. Renewals accounted for 40% of overall leasing, up from the pre-pandemic average of 31%, as occupiers looked to avoid costs associated with moving and building out space. Office-using job growth was flat year-over-year in Q1, according to CBRE.
With 3.3 million square feet of office space delivered during the first quarter, outpacing absorption, overall vacancy ticked up by 10 basis points to 19%.
Prime office buildings continued to outperform the overall market, recording more than two million square feet of positive net absorption in Q1 and pushing the prime vacancy rate down by 50 basis points (bps) quarter-over-quarter to 14.8%. Prime vacancy rates were lowest in Midtown Manhattan and Boston, and the report noted that strong demand and limited new prime construction will soon force tenants to consider moving into lower-quality spaces or relocating to other submarkets.
Available sublease space decreased to 3.7% of total office inventory in Q1, down by 70 bps from a year ago due to a combination of lease expirations and new sublease transactions. The 154 million square feet of available sublease space was down by 20% from its peak in Q2 2023 but remained significantly higher than the 96 million square feet in Q1 2020.
Only 22 million square feet of office space was under construction during this year’s first quarter, with just over half of it pre-leased. Cleveland, Austin, Nashville, Miami and Charlotte have the most space underway as a share of their overall inventory.
Tenants maintained negotiating power during the quarter, particularly in Class B and C buildings amid historically high vacancy, said CBRE. Landlords continued to offer generous tenant improvement allowances and free-rent periods that limited effective rent growth, especially in Class B/C assets.
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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.
