Office

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Office

THE DEVIL IS IN THE DETAILS

Economic Drivers

The impact of hybrid work will continue to influence occupancy requirements over the next several years. However, office attendance peaks at 60-70% on Tuesdays, Wednesdays, and Thursdays, setting a baseline for the minimum office space needed.
U.S. office-using job growth has slowed dramatically, with 134,000 net new office jobs created in 2023, down from 1.1 million in 2022. Office-using job growth will remain somewhat muted in 2024 before picking up in 2025 as economic growth reaccelerates. Interest-sensitive sectors including credit intermediation and information (largely tech) are expected to remain under pressure despite the prospect of interest rate cuts.
Long-term, office employment is projected to rise from 35 million now to 38 million by decade’s end. Job growth is expected to counterbalance the work-from-home trend starting late-2025. After six years of declines, office space net absorption will become positive in 2026.

Outlook

Although office jobs will continue to grow, office demand is still adjusting to hybrid work. We believe we are further along in that process beyond what weighted average lease terms (WALTs) imply, as about half the space on the sublease market has an underlying expiration date in 2028 or beyond. Occupiers have pulled forward future downsizing.

The rationalization of office space usage is ongoing in 2024, and consistent with our prior outlook. This means that net absorption is going to be negative this year (-63 msf) and next year (-7 msf). We expect demand to average 20-25 msf per year as we go into the second half of the decade.

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Office

Vacancy is expected to peak at 21.6% in the second half of next year—when the pipeline will be further tapering off and demand will be stabilizing.

Trifurcation remains a key theme. There are bright spots in the office sector, including that 30% of Class A buildings have no vacancy and another 20% have sub-15% vacancy. The bottom 10% account for over 730 basis points (bps) of current vacancy, reflecting a growing weight that these highly challenged and likely obsolete buildings have on headline statistics.