Office Availability Declines For First Time In Half A Decade

Tenants have been scooping up office space at an accelerating rate over the past few quarters.

But the office market reached an important turning point as Q3 came to a close, with the past several months marking the first time in five years that national availability levels for office buildings declined, according to JLL. 

The availability rate fell 41 basis points during Q3 as net absorption swallowed 8M SF across the country. That represented a 10% improvement from Q2, a JLL report stated. 

“The peak and decline of total availability in the U.S. office market was a significant milestone that reflects a broad tightening of the market,” JLL wrote in its analysis, predicting that vacancy levels will continue to go down over the next six months as signed leases turn into occupied office floors.

The sector reached the milestone despite existing tenants reducing their space needs as leases expire. A total of 53 tenants signed for less space than they previously occupied in Q3, and the 10 largest contractions represented 1.9M SF in occupancy losses. 

But the end of the quarter could be a turning point for the beleaguered asset class — Leasing activity is expected to keep growing at around 10% annually through 2025, with demand for trophy and Class-A properties trickling down into the next-best options as availability declines.

Leasing volume increased in Q2 but grew another 0.4% in Q3 to 50.4M SF, per JLL. Corporate relocations in gateway and secondary markets boosted Q3’s volumes, especially in Sun Belt office markets, which saw leasing growth of 9.4% quarter-over-quarter.

Chevron, SpaceX, social media platform X, Verily Biosciences, Canoo, and Koya Medical all announced plans to move their headquarters from California to Texas. Foot Locker’s announcement of its relocation from New York to Tampa also added to the Sun Belt office wins during the quarter.

The tech sector had made up an average of about 15% of leases since 2010 but accounted for less than 10% of last year’s activity, JLL said. Now, the sector is making a comeback, adding to increases in Q3’s volume even as financial and legal firms dominate leasing activity, the brokerage said.

Sublease availability also fell by 13% over the quarter thanks to decisions like Amazon’s primary care subsidiary One Medical and software company SAS removing spaces they had previously put up for sublease. Sublease vacancy fell to 2.9% nationally.

Asking rents showed minimal growth, however, increasing by just 0.3%. And the sector's challenges could continue as capital continues to target other asset classes, the report warned.

“Investors’ return requirements have widened relative to other property types, meaning that forecasted cash flows will have to be even stronger to allow office developers to procure capital,” JLL said in the report. “However, fully committed projects or developments in extremely strong micro markets may see progress earlier if financial projections are particularly compelling.”