JLL: Growing Tenant Demand, Shrinking Supply Point To Office Market Stabilization

The U.S. office market has faced volatility since the onset of the pandemic, but a new JLL report predicts stabilization is right around the corner. 

The report, released Wednesday, points to four measures — an uptick of return-to-office mandates, growing tenant requirements, declining sublease additions and shrinking high-end availability — as signals that the market will reach stability next year. 

In a sign of coming leasing activity, tenant requirements are up 2.6% quarter-over-quarter in gateway markets and 8% in secondary markets, JLL found. Additionally, tenants aren't looking to offload as much space as before, as gross sublease volume is down 27% for footprints over 20K SF. 

This year will bring nearly 3 million employees under new return-to-office mandates, according to JLL, with that number continuing to rise in the latter half of the year. Previously announced policies went into effect for over 1 million workers in September, and another 500,000 will be subject to such policies between this month and January, according to the report. 

The effects of those policies are becoming somewhat visible, although the return to the office remains muted. In the weeks after Labor Day, Kastle Systems measured the national return-to-office rate above 50% for the first time since January. 

As office returns help bolster demand, the availability of new supply is also shrinking, a dynamic that could bring stability to the market. 

Although national vacancy is up to 21% overall, it is a much different picture for Class-A and trophy office space, according to the report, which estimates that more than 60% of U.S. office vacancy is concentrated in 10% of buildings, mostly 1980s and 1990s-era campuses and towers. 

Conversions are helping to get rid of some of that inventory, though JLL said conversions' overall impact will be marginal. Roughly 19M SF of office inventory was removed from the U.S. this year, with 90% of that coming from conversions, according to JLL's report, which said the volume of conversions through the first nine months of this year exceeded the full-year volume in 2022. 

Meanwhile, as properties move off the market, new-construction volume is hitting record lows. During the third quarter, 1.7M SF of new offices broke ground across the U.S., the lowest in a decade. The new-construction pipeline has declined 33.4% in the past five quarters.