Seeking Stability: A Closer Look at the U.S. Office Market's Future (Maybe) Direction

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,  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. 

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. 

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

There is positive news regarding the decline in sublease additions. However, based on my current client experiences in major cities such as NYC, Boston, Bethesda, Atlanta, Dallas, and LA, it appears that the existing sublease inventory is not being subleases at a rate that will significantly reduce the oversupply of sublease space in the near future.

The return of employees to offices is contributing to increased demand, and simultaneously, the availability of new office supply is shrinking, potentially leading to market stability. The report suggests that this dynamic could have a positive effect. However, it is important to note that demand is particularly strong for newer and improved office projects that offer enhanced amenities to attract and retain employees. If the supply of such high-quality office spaces is limited, there is a possibility that the demand may also be restricted as employees may choose to work from home if their employer cannot provide a competitive Class-A office experience.

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 the report indicated said conversions' overall impact will be marginal. Roughly 19M SF of office inventory (very little) was removed from the U.S. this year, with 90% of that coming from conversions, according to the report, which said the volume of conversions through the first nine months of this year exceeded the full-year volume in 2022. 

According to the report, new-construction volume is reaching record lows, furthering concerns above regarding limited availability of new Class-A office projects and its potential impact on demand. In the third quarter, only 1.7 million square feet of new offices were under construction in the United States, marking the lowest figure in a decade. Additionally, the new-construction pipeline has declined by 33.4% over the past five quarters.

While the JLL report highlights some positive signals in the U.S. office market, such as return-to-office mandates, growing tenant requirements, declining sublease additions, and shrinking high-end availability, it is necessary to approach these indications with caution. The strength and positivity of these signals may not be as robust as they initially appear. Moreover, it is imperative to acknowledge the presence of various variables and uncertainties that may impact the market's outlook.

Concerns surrounding adverse effects of interest rates on both new and existing developments, further contribute to the ambiguity and complexity surrounding the future trajectory of the office market. Consequently, a thorough evaluation and diligent monitoring of these factors will be vital in the coming quarters to gain a clearer understanding of the market's direction and make informed decisions.