First there was COVID. Then came the uncertainty of when, or if, employees would return to the office. Now comes inflation and rising interest rates. No wonder the office market remains in limbo across the United States.
JLL recently released its second quarter office outlook and, in little surprise, it shows an office market that is still struggling to regain its momentum following the pandemic while facing an uncertain economy.
According to the report, office transactions remained largely flat in the second quarter. JLL reported that gross leasing activity totaled 47.2 million square feet in the quarter, an increase of just 0.1% from the first quarter of the year. The reason for the sluggish activity level? Tenants, both large and small, have put their expansion plans on hold as they wait to see the impact of inflation and rising interest rates.
The U.S. office sector is still lagging when compared to the months before the pandemic. JLL says that second quarter leasing activity in the U.S. office market is now at 75.5% of its pre-pandemic norms.
Despite economic uncertainty, nearly half of all completed office leases in the second quarter came in at 10 years or longer, keeping the average lease term at eight years. Short-term expansions remained below 20% of all office lease activity, JLL reported.
Net absorption remained negative in the U.S. office market in the second quarter, with 7.8 million square feet of net occupancy loss during the most recent three months. A majority of the quarter’s negative net absorption — 69.4% — came in the Class-B and Class-C sectors.
Combined with 11.8 million square feet of new office deliveries in the quarter, this negative net absorption led to a 30-basis point rise in vacancy to a new high of 18.9% across the United States. The office vacancy rate stood at 16.5% for buildings delivered since 2015 and 19% for older properties.
Even in the down market, developers are bringing new office space to the U.S. market. According to JLL, that 11.8 million square feet of new office space delivered between April and June brought year-to-date completions to 26.5 million square feet. That puts the U.S. office market on track to repeat 2021’s more than 50 million square feet of new office space.