Office demand was steady during the second quarter with leasing volume holding relatively flat at -2.2% to 49.2 million square feet, while active space requirements grew by 5.8% quarter over quarter, reflecting the highest levels of demand since Q4 2021, according to JLL’s office market dynamics report for the second quarter.
“The leasing recovery is showing its first indications of a plateau, but the slowdown in the first half of the year shows signs of being a temporary disruption that will give way to continued recovery in the second half,” said the report. Trade policy and federal budget shifts may be contributing to increased caution. The slowdown was felt primarily in larger markets, with leasing volume in gateway markets falling by 6% quarter-over-quarter while volume in tertiary markets grew by more than 16%.
High-end buildings are bringing record-high rents, particularly in Miami, New York City and San Francisco, and average asking rent within the construction pipeline has grown 27% year over year to $92.38, the highest level on record, said the report.
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Continued return-to-office momentum is driving occupancy stabilization, which held firm during the second quarter amid modest negative net absorption of 2 million square feet. That was an improvement compared with the -7 million square feet of net absorption recorded during the first quarter. Some markets, however, registered positive net absorption during the second quarter, including New York City and some Sunbelt markets, including Austin, Dallas, Houston, Nashville and Tampa.
Office conversions and demolitions are expected to persist for the foreseeable future, said JLL. Deliveries continue to be outweighed by inventory removals for conversions and redevelopment. Overall inventory declined by 700,000 square feet during the second quarter, with 8 million square feet removed and less than 1 million square feet of new projects breaking ground.
As occupancy stabilizes, positive net absorption that previously only existed in new construction segments for the past six years, is now spilling into the broader office market, said JLL. The entire Class A market, equaling 2.7 billion square feet of inventory nationwide, posted nearly 5 million square feet of positive net absorption during the second quarter.
While marginal occupancy losses persist, downsizing rates have improved significantly over the past 12 months, according to the report. Larger tenants facing expirations have reduced their footprint by just 2.8% over the past year, compared with cuts of more than 11% during the previous year.
JLL noted office-using industries have been resilient in the face of uncertainty stemming from trade policy shifts. Office-using employment in the private sector was unchanged quarter over quarter. The finance industry gained 19,000 jobs, canceling out a loss of 19,000 jobs in professional services. Information employment was unchanged, and government employers added 6,000 positions, according to the report.
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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.
