MARKET DRIVERS
The Peninsula office market in Q1 2024 witnessed a continued decline in demand, partially reflecting the ongoing reassessment of office needs and hybrid working models by firms. Despite this, asking rents managed to hold relatively steady, though tenants continue to hold significant leverage in negotiations. Notably, there a shift in demand patterns among internal county users, with some opting for minor expansions rather than downsizing.
While the market saw increased inquiries and interest from various industries, this enthusiasm has yet to translate into absorption. 1Q posted a moderate increase in negative net absorption over 1Q 2023 figures, though improving markedly over 4Q 2023 numbers. Demand remains strong for spaces under 5,000 SF, with a preference for shorter lease terms.
Vacancy rates have doubled from pre-COVID levels for the first time in Q1. The direct vacancy rate now sits at 16.0% and sublease availability at 5.9%, both up from Q4 figures as the market struggles to absorb existing inventory. Speculative new construction has slowed down significantly, due to the lack of pre-leasing activity and increased interest rates.
ECONOMIC OVERVIEW
Economic indicators suggest a nuanced picture. While interest rates remain stable, prompting cautious optimism, unemployment has seen an uptick, posing challenges for the labor market and by logical extension, near-term tenant demand. Despite signs of economic activity, including increased office attendance and traffic, the market is characterized by a lack of urgency among tenants, who hold significant negotiating power.
NEAR-TERM OUTLOOK
Ahead, the Peninsula office market faces ongoing challenges. Limited demand and high vacancy rates may further pressure pricing and property values, with some properties already showing distress signals, possibly affecting ownership structures.
In conclusion, while certain industries are showing interest and inquiries are on the rise, the Peninsula office market remains in a period of uncertainty. Landlords must adapt their strategies to align with changing tenant preferences and market conditions.
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