For the data behind the commentary, download the full Q1 2024 U.S. Office Report.
Office Employment Growing More Slowly than Rest of the U.S. Job Market
Employment growth in the U.S. continues to surprise to the upside. At the end of March, nonfarm employment was up 1.9% YOY and 0.5% QOQ. That growth has been driven by sectors such as construction, healthcare and government, all of which are sectors that grew by over 1.0% in the first quarter of 2024.
Office-using employment growth, however, has been running at about a third the pace of nonfarm employment. Office-using sectors added 70,000 jobs this quarter (+0.2%), which is an improvement on the 2023 quarterly average (+38,500 per quarter), but well below the nearly 250,000 jobs per quarter added in 2022. Professional and business services fared relatively better with job growth hitting 0.4% QOQ and 2.3% YOY. Information employment declined 1.2% YOY, and after shrinking by 0.2% this quarter, financial services has grown only 0.3% since March of 2023 according to the U.S Bureau of Labor Statistics.
Year Starts with Soft National Demand, but Some Markets Saw Improvements
The first quarter of 2024 marked the ninth straight quarter of negative net absorption across the U.S. Nationally, quarterly absorption came in at -31 msf, bringing the four-quarter rolling total to -78 msf. This is the lowest level in two-and-half years but is still 37% better than the mid-2021 trough of -125 msf.
Despite the weaker trends at the national level, some markets saw positive demand for space. In Q1 2024, 26 of the 90 U.S. markets tracked by Cushman & Wakefield registered positive net absorption. Twelve of those markets had quarterly net absorption that exceeded 100,000 sf: Puget Sound - Eastside (+857,000 sf), El Paso (+261,000 sf), Birmingham (+234,000 sf), Nashville (+215,000 sf), Memphis (+205,000 sf), San Mateo County (+158,000 sf), Minneapolis/St. Paul (+151,000 sf), Oklahoma City (+146,000 sf), Austin (+138,000 sf), Orlando (+114,000 sf), Kansas City (+107,000 sf) and Buffalo (+107,000 sf).
Other markets with positive absorption were scattered across various U.S. regions: Florida (Tampa, Jacksonville, Miami, Palm Beach); the Midwest (Omaha, Cleveland); the Northeast (New Haven, Hartford); the South (Greensboro, Greenville, Charleston, New Orleans, Columbia); and the West (San Jose).
Construction Pipeline Now at 11-Year Low
National vacancy increased by 70 bps in the first quarter, exceeding the 20% threshold for the first time on record. At 20.2%, overall U.S. vacancy is up 210 bps YOY and 770 bps higher than at the start of 2020. Vacancy, however, declined in a fifth of U.S. markets, and it remains below 15% in 34 markets. Class A vacancy—accounting for new construction deliveries—was up 50 bps QOQ.
Part of the recent vacancy increases is related to new office product delivering to the market. There have been 194 msf of new office deliveries since the beginning of 2020, the equivalent of 3.5% of current U.S. inventory, which has pushed up vacancy over the past four years. Vacancies have increased even more starkly in high-construction markets. For example, in the 10 U.S. markets where office deliveries have exceeded 8% of current inventory, vacancy has increased by nearly 1,200 bps on average since Q1 2020—400 bps more than the national increase. In general, although this new product is adding to vacancy, it is leasing up well and is pulling demand away from existing, lower-quality assets.
In today’s interest rate environment, the construction pipeline continues to shrink. There is now 49.7 msf of office space under construction in the U.S., which is the smallest amount since early 2013. The national construction pipeline is now the equivalent of 0.9% of current inventory, which is just a third of what it was in early 2020. There are now only nine U.S. markets where the construction pipeline exceeds 2.0% of existing inventory.
Occupiers making their leased space available for sublease has been another driver of rising vacancy rates. After remaining flat for three quarters in 2021, sublease availabilities increased by 54% over the past two years. The pace of growth, however, has generally been slowing down. At 156.5 msf, the current available sublease inventory increased by 4.1% QOQ, which is well below the average growth rate (5.9%) in the previous six quarters dating back to the middle of 2022. Sublease availabilities declined or stayed flat in 38 U.S. markets, including Austin, Baltimore, Miami, Nashville, New Jersey, Oakland, Philadelphia, Phoenix, Salt Lake City, San Jose and Washington, DC.
For the data behind the commentary, download the full Q1 2024 U.S. Office Report.
