While there are signs of improvement in the hard-hit U.S. office market such as net absorption of empty space rising and new construction completions declining, the overall picture remains mixed with the average office vacancy rate still hovering at a 30-year-high of 19%, according to CBRE’s Q3 office market report and Jessica Morin, director of U.S. office research for CBRE .
“The market is showing signs of stabilization where the worst is most likely behind us and markets are going to start to calibrate around a new normal,” Morin said in an emailed response to questions. “With that said, several indicators, including two quarters of positive net absorption, above average leasing activity, a healthy pipeline of tenants actively searching for space, a slowing construction pipeline, and recent survey results showing more companies planning for portfolio stability and expansion, underscore our most positive outlook in years.”
Average asking rents still increased 0.7% year-over-year in the quarter to $36.23 while average taking rents held steady, as landlords sought to keep face-value rents higher while offering concessions. The discount or difference between average asking and “taking” rents that include concessions such as pro-rated or free rent periods or build-outs ticked up to 11.5% from 11% YOY, and remains well above the 8.6% seen in Q1 2020 before the pandemic and shift to remote work disrupted demand for office space.
Landlords have been incentivized to maintain or increase asking rents because they influence property valuations and financing requirements, Morin said. However, while tenants still have the upper hand in negotiations, the actual mix of the discounts that they will see may be poised to change as some financially strapped landlords in basic “commodity buildings” are having to weigh whether to continue using concessions or lower their asking rent, Morin said.
“Concessions are typically an upfront cost for landlords, including free or prorated rent for the first several months of a tenant’s term and tenant allowances to build out office space,” Morin said. “If landlords do not have the capital to cover these record-high concessions, they will need to roll back concessions and lower asking rents instead.”
Concessions or tenant improvement allowances for top-tier buildings averaged $98 per square foot in H1, down 9% from 2023, while lower-tiered building concessions dropped 9%, as high interest rates damped building values as well as landlord’s capital sources, according to an August CBRE report.
Trimming office space budgets has long been a quick cost-cutting solution for companies, but hybrid work has made more complex the calculations companies and the industry use to trim expenses.
For the first time since the pandemic, a separate recent survey from CBRE showed tenant sentiment has shifted slightly in favor of expanding office footprints — potentially signaling that the space cutbacks are hitting bottom, CFO Dive previously reported.
