Is Office Leasing Rebounding? The Factors Driving Leasing Growth

This quarter witnessed the fastest growth in the office leasing rate in two years. The impressive jump has sparked rumors of a rebound for the office market and overall commercial real estate industry, which has been on the verge of collapse.

?But not so fast. The road to a pre-pandemic level of recovery is still a long one with indefinite challenges. Still, it is a hopeful hint of what’s to come should return-to-office mandates continue. Let's discuss the potential comeback of the office sector.?

Hopeful Office Leasing Gains

The second quarter of 2023 witnessed a notable surge in office leasing, experiencing its fastest growth rate since the second quarter of 2021. This positive momentum is especially significant given the challenges faced by the office sector in recent times. With an estimated 1.5 million office-based workers already affected this year, this upward trend is expected to impact at least 1 million more individuals by the end of the year, signaling a gradual recovery in the office market.

“Leasing rose 7.7 percent in the second quarter from the previous three months of the year.”

-Propmodo

Emphasis on “gradual recovery" in the office market. Because while return-to-office mandates are gaining momentum, we are not seeing the same occupancy levels across the board. This overall lower demand is reflected in leasing levels still well below pre-pandemic averages.

Learn how to take advantage of the cooled demand and find the best office space for the best price.?

Large-Scale Lease Demand is Recovering

But regardless, recovery still is on the horizon. And this is evidenced by the climbing leasing rate of offices over 100,000 square feet.

In Q1, there were 38 leases over 100,000 square feet signed while in Q2, the number rose to 46.?

These larger-scale leases helped to drive the overall growth in signed lease transactions. And this is especially impressive because in a post-pandemic leasing environment, the trend thus far has been towards streamlined footprints. Therefore, there was a notable drop in larger-scale leases as businesses took advantage of the implicit money-saving potential of reductions according to a hybrid or remote dominant workforce.

And just for reference, the issue has gotten so severe for regions that used to be dominated by tech leasing that in Q1, there were zero tech leases signed over 20,000 square feet in hotspots: Atlanta, Denver, Los Angeles and Austin. Read more about what the pullback in tech leasing means for the office market. And with the advent of artificial intelligence, companies will be able to do more with less white collar labor. This will most assuredly impact the demand for office space in the future and continue the trend towards smaller footprints.?

So, the rise in large-footprint buildings is a reason to be (cautiously) hopeful. Because that asset class represents some of the hardest hit buildings of recent years. From the first quarter of 2020 to the fourth quarter of 2022, there was a dramatic raise in vacancy rates among buildings between 100,000 and 300,000 square feet. And when we say dramatic, we mean dramatic, try going from 9% to 57%. Now, net absorption is still in the negative, but it has largely cooled off.

The performance of large buildings has been indicative of the overall market’s health and their rebound is a promising sign.?

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