The office market will continue to reshape itself in 2024.
The post-pandemic office market continued to struggle in 2023, with rising vacancy rates, negative net absorption, and stagnant demand. Largely due to the softening economy and the standardization of hybrid and remote work models, many tenants were forced to reevaluate their future space needs. It is estimated that the average tenant is downsizing their requirements between 20% to 30% to accommodate the evolving workforce, allowing them to maximize their office utilization rates. These trends are expected to bleed into 2024 with low levels of leasing activity, rising vacancy rates, and a further reduction in asking lease rate averages. While there are a few positive signs as the office market reshapes itself with a continued flight to quality and projected tech industry expansion by year-end, it will continue to be constrained in the near term and is likely a few years away from experiencing notable and sustained growth.
Increased office vacancy rates will persist across West Coast markets
Vacancy rates have steadily increased on the West Coast, with San Francisco experiencing the largest rise to 30% at the end of 2023. While San Francisco began to experience an increase in space availability pre-pandemic, especially in sublease space, most other markets didn’t see a notable rise in rates until post-pandemic. Both tech-heavy and urban core markets were the hardest hit from a basis point change, while suburban-centric markets showed more durability, illustrated by Inland Empire posting a modest vacancy rate decline compared to pre-covid levels. Reno, San Diego, and Sacramento also posted lower-level increases (below 300 basis points) compared to the rest of the West Coast.
Office Vacancy Rate By Market 2019 VS 2023
A flight to quality is trending within the newer age segment of office buildings
While there has been a well-documented flight to quality in Class A and trophy properties, there has also been a flight to quality within the newer age segment of office buildings. A divergence between older (pre-1990) and newer (post-1990) began to emerge in 2018, but the gap has widened post-pandemic. The delta between the two age classes topped out with a 3.4 percentage point delta in 2022 as the vacancy rate in the older segment rose to 14.1% and the newer class rose to 10.7%. At the end of 2023, the pre-1990 age class posted a vacancy rate of 16.9% versus 14.4% for post-1990 office buildings. Additionally, performance in office buildings built in the past 10 years is quite similar to properties built over the last 50 years, largely due to their newer materials and amenity-rich environments.
Office Performance by Age Class
There has been a notable performance bifurcation of urban office versus suburban office
Workforce trends were forever altered in 2020 as remote and hybrid work models changed the landscape of office occupancy across the country. These shifts have been most evident when comparing urban markets versus suburban markets, with the latter consistently outperforming in standard fundamentals. When using pre-covid figures as the benchmark, urban cores saw a significant rise in vacancy rates (+14.2%) and a substantial drop in asking rents (-6.1%), while the trend in suburban markets experienced a more subdued increase in vacancy (+6.6%) and a modest increase in asking rents (+7.1%). These trends are projected to persist in 2024 as most workforce trends will solidify.
Urban vs Suburban Office Trends
The office market will continue to struggle in 2024 as fundamentals begin to regroup
The struggle is real, and the trends seen in the office market over the past couple of years will persist in 2024. While tenant demand is beginning to regroup and showing signs of life, forecasts expect another slow year of leasing activity, leading to negative net absorption in 2024 along with rising vacancy rates and declining rent growth. On the positive side, tenants are becoming more confident, with a better understanding of their future space needs. The flight to quality will continue with Class A and trophy properties while newer office buildings are expected to perform relatively well. Office-using job growth is expected to be positive in the near term, especially within the tech sector, which will be one of the key industries driving the office market recovery.
West Coast Office 3-Year Forecast