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A small pool of underperforming office buildings is bearing the brunt of lost occupancy and dragging down absorption data, according to a new analysis by JLL.
Despite record levels of overall negative net absorption, only 12.7% of offices reported negative absorption, JLL said. That is the lowest proportion since the third quarter of 2017 and below the average of 14.4% over the last 20 years.
"One of the interesting paradoxes of the office market over the past few years is that there has been record occupancy loss, but the share of buildings experiencing the 'down market' is small," Jacob Rowden, research manager of U.S. offices, told Bisnow. "The vacancy increases in that segment of the market have just been especially intense."
Over 60% of office vacancy is centralized in 10% of buildings, with 39% of buildings having no vacant space, according to the brokerage.
The segment of offices posting occupancy drops peaked at 17.3% during the last half of 2020. That was driven by early stage companies leaving their older offices for newer and highly amenitized buildings, a trend that began pre-pandemic and has remained strong over the past five years, Rowden said.
Owners of lower-tier buildings have been spending those years trying to adapt to the changes in the market, but they have struggled due to the cost of updates and decline in demand, including from the shifting nature of office usage. Tenants require much less space than they did in past decades. A Brookfield case study found a NYC law firm only needed 60% of the space per employee compared to 2000 due to technological advances.
Buildings that are new and cater to the current lifestyles and needs of tenants have escaped demand-driven headwinds in the market — for the most part. Those buildings make up a small portion of supply, as less than 25% of office buildings were constructed after 2000, JLL said.
Demand is starting to rise. Leasing was up 14% quarter-over-quarter to 57.1M SF, as were active tenant requirements, JLL said in its Q4 office outlook.
Office attendance is also rising, albeit slowly. Kastle Systems' Back to Work Barometer shows occupancy rose 1.4 points to 51.8% during the week of Feb. 21, an uptick after weeks of sliding figures, which Kastle said was most likely due to weather-related conditions along the East Coast.
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