Office Market Overview Report: Part One

SKIP AHEAD TO

• Gateway U.S. Office Markets
• U.S. Office-Using Employment Is up 6.1% From Year-End 2019
• Financial Services and Professional Services Employment Reached Post-2000 Peak in 2023
• NYC and San Francisco Vacancies Rose Quarter Over Quarter but Trail National Central Business District Average
• Remote Work Trends Hold Steady in 2023, With Approximately 30% of Days Spent Working From Home
• 2024 and 2025 Are Pivotal Years for Future Space Demand and Peak Years for Upcoming Lease Expirations

In this inaugural report, CompStak took a closer look at market statistics for major gateway markets with a supplemental dive into New York City’s market and CompStak trends on effective rents, lease terms and concessions and more. CompStak also focused on evaluating the leasing trends across three categories: Prime Class A buildings, the rest of the Class A market and then B/C buildings. 

With so much debate about the top of the market or trophy buildings as being the only bright spot in the office market, CompStak sets to dig further into what the data actually shows for Gateway Office Markets.

Download the full report here! Stay tuned as we explore each section of the report in our blog post series.

Gateway U.S. Office Markets

1. Office-using employment in the U.S. has remained resilient, with a notable recovery to pre-pandemic levels within 18 months and both Professional Services and Financial Services reaching their post-2000 peak in 2023. However, concerns persist about potential job losses amid recession fears, which could further impact office demand.
2. In 2023, remote work levels remained steady, with around 30% of days spent working from home in the U.S., as per the Survey of Working Arrangements and Attitudes from WFH Research. January 2024 saw 28.8% of days worked from home, up 1.7 percentage points from January 2023.
3. 2024 and 2025 are major years for U.S. lease expirations, with a significant portion (25.2%) of current office space set to expire by the end of 2025, according to CompStak. This coincides with a substantial number of loans reaching maturity and historically high interest rates, adding to market uncertainty.
4. For the past two years, average transaction sizes have decreased for Class B/C and non-Prime Class A office spaces, while the average for Prime Class A transactions has rebounded from a pandemic low in 2021.
5. While concession ratios increased from 2019 to peak at 13.5% in the fourth quarter of 2022 across gateway markets, they slightly declined to average around 13% throughout 2023.
6. Effective rents for Prime Class A office buildings have plateaued since the end of 2022, but are still up substantially from pre-pandemic levels, which has made the gap between effective rents for Prime Class A office buildings and other Class A spaces almost double what it was in 2019.

U.S. Office-Using Employment Is up 6.1% From Year-End 2019

As of December 2023, office-using employment is still up 6.1% from its level in December 2019, despite falling 0.3% from its post-pandemic peak in May 2023. From February to April 2020, the U.S. lost 8.5% of its national office-using employment but recovered to February 2020 levels in 18 months. By contrast, it took 76 months to recover to the peak reached right before the Great Financial Crisis.

Despite employment remaining solidly above 2020 levels, many are still on the lookout for accelerating losses amid recession concerns. As of yet, there has not been a substantial downward trend, and the overall U.S. unemployment rate is 3.7%, close to a cyclical low. More importantly, this recovery in U.S. office-using employment did not positively correlate as much with increased office demand to date in a shift from past cycles. Still, increased job losses would be expected to be a further drag on new office demand.

Financial Services and Professional Services Employment Reached Post-2000 Peak in 2023

Professional and Business Services and the Financial Services sectors reached their post-2000 peak in May 2023 and August 2023, respectively. Information, meanwhile, achieved its peak level since 2000 in March 2001 and its low in March 2021. Overall, the Professional and Business Services sector saw the greatest increase from February 2020 to December 2023, with an expansion of 7%.

NYC and San Francisco Vacancies Rose Quarter Over Quarter but Trail National Central Business District Average

In the NCREIF Property Index (NPI), which reflects an index of institutional-grade assets, office vacancy rates have been steadily rising since 2020, with vacancy rates for national Central Business District (CBD) office space outpacing the suburban average since the end of 2021. The national CBD vacancy rate has surpassed its previous peak in the wake of the Great Financial Crisis and increased for 16 consecutive quarters through the end of 2023.

Remote Work Trends Hold Steady in 2023, With Approximately 30% of Days Spent Working From Home

According to insights from WFH Research and the Survey of Working Arrangements and Attitudes, the number of paid full days working from home has largely stabilized across the United States at or close to 30%. In January 2024, the survey measured 28.8% of days worked from home, up 1.7 percentage points from January 2023. The survey has maintained an average of approximately 29.2% from August 2023 through the end of January 2024. According to researchers, the pre-COVID-19 level was estimated to be around 7.2%, indicating that the latest average exceeds the pre-COVID average by fourfold.

2024 and 2025 Are Pivotal Years for Future Space Demand and Peak Years for Upcoming Lease Expirations

The next two years are poised to be challenging for the U.S. office market as a significant share of current office leases in gateway office markets are set to expire by the end of 2025 (25.2%), according to CompStak’s data. This lease rollover is happening at the same time as a robust share of loans reaches maturity and interest rates are at their highest rates in decades, with a lack of clarity as to when or if they might start coming down over the next year. This upcoming period will also be revelatory because many office tenants have yet to decide on their post-pandemic office needs. These upcoming space decisions could provide a greater understanding of future space demand and tenant preferences. The majority of these leases rolling over were executed in 2019 and prior, despite the uptick in short-term leases signed during the depths of the pandemic.

Get more insights into U.S. gateway office markets and download the full report!