In an encouraging turn for the U.S. office market, the second quarter of 2024 has witnessed a surge in leasing activities, marking the highest volume since the pandemic began. According to JLL's latest U.S. Office Market Dynamics report, leasing volume has increased by 15% quarter-over-quarter (QoQ), reaching nearly 90% of pre-pandemic levels.
Key Findings:
- Leasing Volume Soars: The leasing volume in Q2 2024 reached 50.2 million square feet, representing a 15% increase QoQ and a 7% rise year-over-year (YoY). This growth is attributed to a series of large transactions, including Bloomberg's renewal of approximately 900,000 square feet in Midtown Manhattan, highlighting a newfound confidence among larger tenants.
- Occupancy and Sublease Trends: While total occupancy contracted by 8.9 million square feet, the rate of negative net absorption declined by over 50% QoQ. The sublease market also showed signs of recovery, with sublease additions decreasing by 32% compared to 2023. The sublease vacancy rate has dropped for the third consecutive quarter, driven by 5.8 million square feet of subleases signed.
- Tenant Preferences Shift: The past year has seen a shift in leasing strategies due to cyclical pressures. Tenants are increasingly opting for renewals, extensions, and subleases over new leases and relocations to avoid high capital costs. This change has resulted in tenant improvement (T.I.) allowances becoming a barrier, pushing tenants towards pre-built spaces and spec suites.
- Economic Indicators and Market Confidence: The economic landscape has brightened with steady progress in combating inflation and a stable labor market. The core personal consumption expenditure price index has shown significant improvement, and the office-using industries have added more than 40,000 jobs in the private sector in 2024. This positive outlook has bolstered tenant confidence in committing to larger and longer-term leases.
- Development and Capital Markets: Despite the leasing recovery, new developments remain scarce, with groundbreakings concentrated in high-growth markets. The capital markets have lagged, though sales volume improved in the first half, primarily due to an entity-level medical office portfolio transaction.
- Sector-Specific Activity: The technology sector has seen a slowdown in leasing volume, while finance and legal sectors have been more active. The artificial intelligence sub-sector continues to thrive, particularly in the Bay Area, exemplified by Scale AI's sublease of former Airbnb space in San Francisco.
As the U.S. office market continues to navigate post-pandemic challenges, the second quarter of 2024 reflects an upward trajectory in leasing activity, driven by strategic shifts in tenant preferences and a favorable economic climate. The remainder of the year is anticipated to maintain this momentum, with further interest rate cuts potentially stimulating the capital markets.
