Most Cities See Gains In Office Absorption, But It Could Be Short-Lived

Companies are eating up more office space than they’re leaving empty in more U.S. cities than a year ago, following the overall U.S. market turning positive for the first time in two years.

During the second quarter, 37 out of 64 major U.S. office markets posted positive net absorption, the industry term for when companies lease more space than they empty, compared to 23 markets a year prior, according to a CBRE study released Wednesday.

The last time more U.S. cities saw positive absorption was in the second quarter of 2022, when 41 U.S. office markets tracked by CBRE posted absorption gains. 

The report follows VTS' most recent Office Demand Index, which showed a sustained expansion in the number of square feet companies were seeking in the U.S. office market, up 34% since the bottom of December 2022, GlobeSt reported.

But office landlords, who have been hammered by anemic office demand, inflation and high interest rates, shouldn’t break out the champagne just yet. While Q2 saw absorption turn positive by 2.5M SF for the first time since 2022, the next few quarters should see absorption turn negative yet again, CBRE Senior Economist Christina Tong told Bisnow.

Facing fears over a possible recession and adjustments to hybrid work schedules, 75% of U.S. businesses planned to shrink their office footprints in 2024, according to a survey of 500 businesses from the hybrid work platform Robin.

“It’s still very mild, this positive net absorption,” Tong said, adding that a slowdown in job growth coupled with companies continuing to rightsize their office footprint will contribute to the absorption slowdown.

Developers are also expected to unleash 33.5M SF of new office space over the next two years, which means trouble for owners of older office buildings. Trophy and Class-A offices have gained a disproportionate share of office leasing activity compared to older buildings since the pandemic began, and relocating companies shrink their footprints by an average of 32%, according to CBRE.

Office utilization has been flat, according to a recent NAIOP study, which projected U.S. absorption to turn negative by 11.8M SF for the final three quarters of this year.

“The longer that firms face slow economic growth, elevated inflation and high interest rates, the more likely they are to seek cost reductions and operational efficiencies,” Manhattan College’s Hany Guirguis and Fordham University’s Joshua Harris wrote in the NAIOP report. “Unfortunately for the office space market, this frequently translates to curtailing office real estate expenses when possible.”