The Q2 2022 U.S. office numbers are in.  Net absorption turned positive in the second quarter and there was minimal change in vacancy.  The overarching trend for the U.S. office market remains one of stabilization.

The U.S. office vacancy rate stands at 15.1%, an increase of 10 basis points in the second quarter.  However, vacancy is still comfortably below the record peak of 16.3%, seen at the height of the Global Financial Crisis.

Net absorption, which measures the change in occupied office inventory, was positive in over half (53%) of the office markets tracked in our national survey.  National office absorption totaled 3.1 million square feet and has been positive in three of the past four quarters starting in Q3 2021.  This marked a significant turnaround from the prior four quarters when cumulative net absorption was negative 141.8 million square feet.

Eight metro office markets posted more than 500,000 square feet of positive absorption in Q2 2022, led by New York City (1.1 million square feet), Atlanta (one million square feet) and Los Angeles (921,000 square feet).  Denver, Philadelphia, Phoenix, Raleigh-Durham and San Diego also saw healthy gains.

Chicago took the hardest hit with 997,000 square feet of negative absorption in the second quarter.  Minneapolis also posted over half a million square feet of negative absorption. The bifurcation of the San Francisco Bay Area continues. Second quarter net absorption was negative 505,000 square feet in the City of San Francisco, while Silicon Valley saw 707,000 square feet of occupancy gains.

There is now a record 217.8 million square feet of sublease space available across the U.S. office market, significantly higher than the prior peak of 143.3 million square feet seen in Q2 2009.  As firms continue to evaluate their post-COVID real estate needs, sublease space will remain a cost competitive, short-term option until there is greater clarity on business and economic direction.

Construction activity continues to slow.  Currently 119.9 million square feet are underway, which is down 27% from this cycle’s peak of 164 million square feet, seen in Q3 2020.  The New York metro area has by far the largest amount of ongoing construction, at 22.1 million square feet, followed by the San Francisco Bay Area with 11.6 million square feet and Seattle with 7.3 million square feet.

Asking rates are, by and large, holding firm.  However, the gap between asking and effective rents remains significant due to increased concessions on offer.  Tenant improvement allowances of $100 per square foot or more plus 12 to 15 months of rent abatement are available in several major markets when a tenant signs a new 10-year lease on Class A space.

There is considerable debate and speculation regarding the future of the U.S. office sector.  While employees are returning to the office, occupancy levels rose by a modest 210 basis points in Q2 2022 to 44.1%.  Some degree of remote working is here to stay, but we are still awaiting clarity on the adoption of hybrid working and how many days per week people will be required to be in the office.

It will take time for firms to recast their property strategies and decide how much space will be needed going forward and where it should be located.  Uncertainty in the economy is clouding the picture, further impacting the timing of such decisions.  Existing lease commitments will also restrict the ability to implement change.  Structural shifts in the U.S. office sector may be afoot, but they will take some time to play out.