Goldman Sachs: Office Submarket Recovery Signals The Worst Is Over

Office may have bottomed out, according to Goldman Sachs.

There have been eight consecutive quarters of transaction volume declines since the third quarter of 2022, Caitlin Burrows at Goldman Sachs said, as reported by Benzinga. It took the same amount of time before the market showed positive signs of activity during the Global Financial Crisis. 

Goldman said the market will probably bounce along the bottom for a few quarters before it turns to recovery mode, but leading indicators show things are starting to turn a corner.

The Organisation for Economic Co-operation and Development's U.S. Composite Business Index predicts office leasing volumes by two quarters, and it shows steady improvement in the office market for the last few months. 

While office activity used to make up a quarter of the prepandemic market, that number is now at 15%, highlighting the structural changes in the national office market. Still, the report points to high-quality and cash-flowing assets in popular submarkets having the most leasing momentum and doing the heavy lifting in national valuations. 

In particular, Burrows highlighted Manhattan's positive leasing activity and the artificial intelligence boom in San Francisco as spearheading improvements in their respective markets, boosting valuations nationwide. 

In San Francisco, 1.6M SF of leases, renewals and subleases closed during Q2, and AI companies make up 25% of that activity, CBRE found. Prospective tenants are still coming in, with office tour activity skyrocketing 73% month-over-month in May, the Goldman report says.

New York City tenants signed 11.5M SF in office leases during the first half of 2024, an 11% improvement from last year, JLL data shows.

NYC office availability fell from 87.8M SF to 86.5M SF in the second quarter, a drop driven mostly by leases in trophy and Class-A buildings.

The vast majority of the office leases being signed nationally are in newer, amenity-packed buildings, which are getting an 84% rent premium due to their perks.