The US office market vacancy rate will continue to rise next year before peaking in early 2025 at 21.5%, Cushman & Wakefield predicts.
This is up another 210bp from today’s 19.4%, the firm says in its macro outlook report for 2024.
Rents will decline by a further 5.4% in 2024, bringing the total peak-to-trough decline to 23%, before growth resumes in H2 2025.
The forecast was accompanied by a warning that a rolling recession has begun in certain segments of the US economy, whereas in Europe Cushman is forecasting “measured expansion rather than recession”.
Its US report says: “Sectors that are currently experiencing some version of a recession include manufacturing, transportation and warehousing, finance and real estate. Whether it is leasing or investment volumes, construction starts or home sales, real estate has slowed across the board.”
However, the firm’s research suggests that the office market is now well into the downsizing resulting from the transition to hybrid and remote working, and so “demand destruction” will begin to taper off.
By 2025, the firm predicts that most firms will have completed their downsizing. This means the relationship between job growth and demand for office space can re-establish itself, and the office sector will begin to see positive absorption once again. From 2025 to 2033 (the end of Cushman’s 10-year horizon), it expects 222m sq ft of net absorption to be realised.
The sector’s performance is expected to remain highly uneven. The best stock – the top 10-15% of any given market – has consistently outperformed lower-quality offices since 2020, registering 100m sq ft of positive net absorption. These assets are mostly new buildings with excellent amenities and in prime locations.
However, the supply of new buildings is rapidly shutting down given the tight lending conditions and higher cost of borrowing due to the rapid rise in interest rates. As a result, the highest-quality product will experience “very strong lease up”.
Cushman predicts that demand will eventually trickle down and will be added to by value-minded occupiers, fuelling demand for lower-quality Class A and Class B/C buildings. Not all occupiers require, or even desire, “trophy office” space, it says.
Indeed, there has been 261m sq ft of leasing activity in non-Class A buildings since Q2 2020, which accounts for roughly one-third of total US leasing. This one-third portion is on a par with the pre-pandemic norm.
“This is not to diminish the reality that the vast majority of poorly located lower-quality buildings will remain under significant pressure,” Cushman says. “It is to simply acknowledge that there is a need for a range of office space quality for a diverse occupier base.”
Sector round up
Industrial
Industrial net absorption slowed in 2023 coming off frenetic back-to-back years in 2021 and 2022.
Since the industrial boom that brought vacancy down to 2.8% in Q2 2022, vacancies have been drifting higher, rising to 4.7% as of Q3 2023. Vacancy will peak in early 2025 at 6.2%, roughly 200 bps lower than the historic average.
Occupiers are lined up for a decent share of the existing construction pipeline, and development will taper off quickly as construction starts (measured in square feet) are down by 60% thus far in 2023. Cushman forecasts demand to return to its pre-pandemic pace (around 275 to 300 million sq ft per year) by 2026 while completions start to ramp back up. The current supply-demand imbalance will reverse, and vacancy will return to sub-5%.
Retail
The resilience of US consumers has been a key ingredient supporting economic growth and the retail property sector this year.
Announced store openings for the year-to-date are outpacing closures by a margin of 1,000, thanks primarily to the nearly 1,800 net openings in the discount sector alone.
Construction has been subdued during the recent period of healthy demand, leading to historically tight vacancy rates and rental increases. Cushman’s baseline forecast projects that net absorption will decline by only 11.4m sq ft between 2024-2025, less than half of the decline experienced in 2020.
Multifamily
Despite an unprecedented supply wave, the apartment market is enjoying a solid year characterised by healthy rental demand and positive rent growth.
Macroeconomic and demographic factors have contributed to resurgent demand this year. Amid sharply higher mortgage rates and buoyant single-family home prices, the economics of renting versus owning have never been more favourable.
The national vacancy rate will increase from its current level of 7.8% to reach 9% at the end of 2024 as leasing momentum slows, before retreating to historical norms.
New supply is expected to crest in early 2024 and Cushman is forecasting 400,000 new units to come online next year in total. But after that, supply is set to slow abruptly, settling into an average of 183,000 units delivered per year from 2025-2027, nearly 25% below the 2015-2019 average.
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