Office Optimism Builds As RTO Mandates Push Downsizing To Lowest Level Since 2019

Corporate executives and office brokers spent much of the last two years describing the widespread shrinking of office footprints as “rightsizing,” a euphemism that obscured the fact that most tenants were cutting space. 

But downsizing activity in the fourth quarter was at its lowest point since the start of the pandemic as corporate occupiers signal they are getting serious about return-to-office policies. It is an early sign of a shift in leasing strategies, with occupiers giving back less space and even expanding to welcome back employees who had been working from home. 

“There's a lot of optimism right now in the market,” said Danny Mangru, a senior manager and head of U.S. office research at Avison Young. “And where things are heading from a capital markets perspective, it’s also going to help drive the leasing market.”

Large tenants that renewed leases in the fourth quarter cut their footprints by 2.9% on average, the third consecutive quarter in which tenants gave back less space and a 5-percentage-point drop from the prior quarter, according to JLL.

On a 12-month rolling average, tenants downsized by 7.9% in Q4, down from 11.7% footprint reductions a year earlier.   

“From 2021 to 2023, a lot of focus was on the saving of real estate capital and cost by downsizing footprints for renewals and restructuring leases,” said Chase Monroe, JLL’s U.S. brokerage president and head of tenant representation for the East region. “Companies are realizing that they’re [in the office] four to five days a week for the most part, and the real estate footprints that had shrunk need to actually expand the other way.”

Leasing activity was at 290M SF for the year, more than 10% behind prepandemic levels and slightly below 2023 volume, according to Avison Young. Still, U.S. office availability, at 23.4% in December, has fallen for two consecutive quarters for the first time since 2019, in part because of limited new supply and the removal of aging inventory for conversions.

For spaces larger than 10K SF, the average new lease size in 2024 was 25K SF, a six-year low. But the 44K SF average renewal was at its highest level over that same period and 11.7% above 2019 levels. 

More tenants are also expanding, accounting for 9.4% of leasing activity in the gateway markets of Boston, Manhattan, San Francisco and Washington, D.C., according to Avison Young. A similar amount of space was leased for expansions in 2019, the other year with the largest expansion footprint since 2015.  

“A lot of these larger occupiers are opting to renew, and they're actually longer-term renewals,” Mangru said. “They’re not kicking the can down the road for two years. These are 10-, 15- or 20-year renewals. That's really stabilizing a lot of these larger institutional landlords’ portfolios.”

Lease renewals accounted for a decade-high 53% of leasing volume in 2020 as occupiers grappled with the pandemic’s impacts. Renewal activity retreated below 35% for each of the next two years but surged again to 47% in 2023, a year with historically low expansion volume. 

While the average lease size has grown, renewal activity is down roughly 5% year-over-year, which Mangru said was a positive sign for the market, signaling some occupiers are executing postpandemic leasing strategies. 

The shift away from wait-and-see occupancy has already started to manifest in the market, with the office sector at the end of December marking the first quarter of positive absorption since 2021, JLL reported. 

The top-line data highlights a broad U.S. rebound but obscures the wide gap in performance across different cities. Comparing the office sector to baseball, Mangru said each market was at a different point. 

“For a lot of our market, we're in the early innings of recovery. You have some markets where we’re kind of wrapping up spring training and trying to get into the regular season of this recovery,” he said. “Manhattan is probably in the fifth inning, but you’ve got other markets like Chicago that are trying to wrap up spring training.” 

There is also a wide demand disparity between the highest-quality office buildings and less modern offices where the tenant base has continued to search for cost savings. 

Top-quality office assets drew nearly 70% of 2024 leasing activity, roughly in line with trends over the last decade, according to Avison Young. The limited availability for the best assets is likely to lift the performance of properties in the next tier down, Monroe said. 

“The flight-to-quality buildings in most of the growth markets are pretty full, or the spaces are spoken for,” he said. “And we have had a lack of development starts over the last few years — rightfully so — and so there's going to be a gap between the time for new developments to come online. That's going to fill the second grouping of offices where there might be some larger holes in some markets.”

Those landlords are already finding some success in luring tenants with generous concession packages, enticing tenants with funding to build a high-quality space. But that dynamic is flipped for the newest, best offices in high-demand markets, Monroe said.  

“That brand-new building has the keys to the castle,” he said.