Opportunity Amid the Depressed Office Real Estate Market
by King White, on Feb 2, 2024 8:00:00 AM
As we step into 2024, the office real estate market is presenting a unique landscape, marked by increasing vacancies, depressed asset valuations, maturing loans and shifting dynamics. This environment is creating rare opportunities for tenants in the market to take advantage of the situation. To help guide tenants through this landscape, Site Selection Group has outlined what to expect and how to approach the office site selection process.
The state of the market
The U.S. office vacancy rate is projected to peak at 19.8% in 2024, a notable rise from 18.4% in Q3 2023 and significantly higher than the 12.1% at the end of 2019. This increase in vacancy rates is largely attributed to the continued normalization of hybrid working arrangements limiting the growth of office demand. Despite these challenges, office leasing activity is expected to experience a slight revival in 2024, although it will remain significantly below pre-pandemic levels.
It has generally become a “tenant’s market;” however, the opportunities will vary by city, submarket and office product category as many companies continue to dispose of older, less desirable real estate in favor of newer office product. Below are a few ways that tenants can take advantage of market conditions:
- Favorable rental rates: The elevated vacancy rates and the economic slowdown are leading to lower pricing for office assets, particularly Class B and C office assets. This trend allows tenants to secure office space at more competitive rates. Please be aware that rental rates for Class A assets have remained relatively resilient.
- Lease concessions: Landlords, in an effort to attract tenants, are offering more favorable lease terms. This could include shorter lease terms, early cancellation provisions, free rent and more tenant improvement allowances.
- High-quality options: With the slowdown in office construction to the lowest level since 2014, there could be a shortage of available Class A space later in the year so now is the time to move on securing Class A space especially if it is a brand new building nearing completion.
- Strategic relocations: Many tenants are using market conditions as an opportunity to downsize and relocate from less desirable office space to higher-quality facilities. The financial impact of the relocation to higher-cost space can often be offset by downsizing the space rented.
- Economic incentives: Many tenants relocating are eligible for economic incentives such as tax abatements, cash grants, tax credits and other state and local grants. It is important to pursue these incentives to help offset your relocation costs while maximizing the benefit of your capital investment and job retention in the local community.
Navigating the market
While there are opportunities, tenants must navigate this market utilizing a strategic site selection process to evaluate all options and maximize negotiation leverage. Understanding the local market conditions, being aware of the long-term implications of leasing decisions, and seeking professional advice from a real estate broker specializing in tenant representation can be crucial in making the most of the current market scenario.
The office real estate market in 2024 is marked by challenges, but within these challenges lie significant opportunities for tenants. The key for tenants is to approach the market with a well-informed strategy, taking advantage of the softer market conditions to secure favorable lease terms and prime locations.