The pace of office occupancy losses has slowed dramatically over the past 12 months, and surging leasing activity indicates that the long-awaited recovery is at last underway.
However, the relatively small number of major office markets experiencing meaningful demand growth signals that the sector is still waiting for a broad expansion to kick in.
New York City has made headlines in recent months, posting positive net absorption, the net change in occupancy, in each of the past four quarters. The cumulative amount of recovered office occupancy to date in the world's largest office market is now about 5 million square feet, or about 0.5% of the market inventory.
Not many other large U.S. cities have seen a similar resurgence, however. Of the 12 markets with at least $50 billion in office asset value, only five have recorded positive net absorption over the past year, and only the Dallas-Fort Worth and San Jose office markets have seen a recovery relative to inventory that is anywhere close to that of New York’s.
More broadly, of the 48 markets with at least $10 billion in office asset value, 12-month net absorption has been positive in only 27. This disparate performance in office demand among major markets is unusual. In the long expansion before 2020, it was more typical that about 90% of the top 48 markets observed positive net absorption in any given 12-month period.
On the other end of the spectrum, Boston has suffered the most severe occupancy losses of any office market in the past year as it has grappled with the evaporation of demand from biotech firms. Negative absorption has continued to plague most other gateway markets as well, though Seattle did see absorption turn positive in the first quarter, and strong leasing in San Francisco suggests a return to positive absorption will happen soon.
The picture is brighter in smaller office markets, which have proven more resilient in the past few years as they are generally less susceptible to the risks associated with remote work. Aggregate office occupancy in these markets has increased by nearly 7 million square feet in the past year.
This represents only about 0.2% of inventory, however, compared to the 0.7% to 0.8% share of inventory that was typical during the late 2010s, indicating that they are not immune to the slow-growth environment that has recently prevailed in the job market.
The relatively narrow geographic base of the office recovery so far is a reminder of the long-term challenges the office sector faces. While the momentum has clearly shifted in recent months, the impact is far from uniform. It may still be some time before some markets find their footing.
