Available U.S. Office Space Tops 1B SF For First Time

Overall available office space in the U.S. reached a new high-water mark in the first quarter, topping 1.2B SF, according to new data from Avison Young. 

Representing 23.7% of the office inventory in the country, that number consists of direct and sublease availabilities and is a record at least in this century, by Avison Young's count.

There were slumps in office leasing activity in the aftermath of the dot-com bubble and the Global Financial Crisis, but they weren't as pronounced as today's and were of an entirely different nature, according to AY U.S. President Harry Klaff.

“Even though we were in recessions, there wasn't a functional change in how people were using office space,” Klaff said. 

Of course, the country's office market is bigger today than ever before, making the possibility of more than 1B SF of available space more likely than previous recessions. And the pre-pandemic total is an important piece of context: In the years leading up to the coronavirus, 800M SF of office space nationwide was available.

Still, the figure is a stark reminder of the new reality that has taken shape since early 2020.

Office leasing activity in Q1 was 52.2M SF, down 32% from a year earlier and off 36% when compared to the pre-pandemic average, AY reported. Large-block office leasing is also down, with the number of leases over 100K SF falling from 67 in Q1 2023 to 36 so far this year.

That hesitancy to pull the trigger on new space is related to large occupiers' uncertainty around their future space needs.

Remote and hybrid work play a major part. A Pew Research report last summer showed that 35% of workers with jobs that can be done remotely work from somewhere other than an office, down from 43% in 2022. Before the pandemic, just 7% of workers said the same.

But there are factors beyond the pall of remote work. Sticky inflation and the high interest rates that came with it added an economic layer to the societal factors playing into companies' resistance to returning to the office at the same levels as before the pandemic.

“The cost for relocation is dramatically more expensive today than it was a few years ago, given inflation and also cost of money,” Klaff said. “How much out of pocket does a company need to invest to move from Point A to Point B? Given the uncertainty of the economy, companies are really careful about spending their money right now.”

The CRE industry has waited anxiously for an interest rate cut since the last meeting of the Federal Open Market Committee last year. But with inflation hovering around 3% and a fresh crop of strong hiring data, the wait seems likely to continue, at least in the near term.

Meanwhile, landlords with underused properties and variable-rate mortgages struggle with debt loads, resulting in defaults, foreclosures and an increasingly skittish pool of potential lenders. These factors bring even greater hesitancy to the market and close off capital flows companies might have used to expand.

There are a few rays of hope, however. 

Swaths of layoffs in the last two years, particularly in the tech sector, have shifted the balance of power between companies and workers, AY reports. 

The ratio of employee quits to layoffs, a metric tracked by the Bureau of Labor Statistics, was as high as 3.1 in 2021. In Q1, it came in at 1.2, pointing to a more difficult labor market for employees. Many in CRE have argued that such a shift could provide companies with more leverage to get workers back to the office.

Then, there's the now-ubiquitous refrain about a flight to quality among office users.

The average length of a lease in trophy assets is 27.1% longer than leases overall, AY found, and highly amenitized product drives higher rents, even in markets with high vacancies like San Francisco. 

Most gateway markets are still experiencing a flight to quality, with Chicago, Manhattan and Houston all experiencing over 70% of leasing activity occurring in trophy and Class-A spaces so far this year, the report says.

And there's still that rate cut to hope for. 

“It's also important that we're expecting the Fed to cut rates at some point in the second half of this year, and that's going to provide some momentum,” Klaff said.