JLL’s recent chart of the week, showing gross office leasing activity, presented what might be a surprise given the doom and gloom the sector faces. Leasing activity improved in the second quarter with the fastest growth rate since 2021 Q2.
However, tempering the good news somewhat is context. The 41.9 million square feet of leasing, is still not at the 47.9 square foot level of 2022 Q2. Compared to pre-pandemic 2019, it is 27% lower.
Out of 53 tracked markets, 35, or 66%, saw quarter-over-quarter growth. Since Q1 2019 where 74% of markets saw growth, only in Q1 2021 was a greater percentage, 72%, of markets growing.
Helping to drive the growth was an increase in signed lease transactions for more than 100,000 square feet. Net absorption is still negative but has decelerated. Also, the pace of sublease vacancy additions has begun to slow.
Jacob Rowden, manager of JLL Research attributed the growth to several reasons, “the primary being that we saw large-scale transactions drop to the lowest rate throughout the pandemic in the first quarter, but that’s started to bounce back in Q2. In Q1 we had 38 leases over 100,000 square feet and for Q2 we have seen 46.” He said the number would likely climb through retroactive data collection.
But another important factor is flight to quality. “The dominant trend during the pandemic has been for tenants to upgrade into higher-end space when leases have expired during the pandemic, and that continues to be the case in Q2,” Rowden tells GlobeSt.com. “Buildings constructed since 2015 saw 9 million square feet of positive absorption in Q2 and have generated 112.5 million square feet since the pandemic began. As tenants have become more defensive over the past 12 months, we are seeing more renewals, but it remains a very strong trend even in recent quarters.”
Not all growth was equal. “Ranges can be very wide especially in smaller markets where large transactions took place during Q2,” Rowden says. “For instance, the fastest growing market quarter over quarter was Baltimore at 182%, but to get a sense of how it’s spread out there were six markets that grew by more than 100%, five that grew by 50% to 99%, seven that grew by 25% to 49%, and 17 that grew by 0% to 25%. On the declining side, eight markets fell by 0% to 25%, seven fell by 25% to 49%, and three fell by more than 50%, the highest decline being 75%.”
“We also see office attendance continuing to improve and a large volume of employers issuing return-to-office mandates, which have impacted at least 1.5 million office-based workers in the U.S. already this year and will take effect for at least 1 million more through the end of the year,” he said. “We think that vacancy rates in the U.S. will peak over the next 12-24 months and then begin to improve. Construction starts have declined by about 80 percent over the past 12 months, so that is going to significantly decrease the amount of new supply delivering to the market in 2-3 years. At the same time, we’re seeing a record volume of inventory removed for conversion, demolition or redevelopment, which will potentially lead to reductions in U.S. office inventory as deliveries slow.”
Some good news for property owners: JLL hasn’t seen a large move for price bargain hunting on the art of tenants “because we’re also in a situation where landlords are less able to fund large tenant improvement allowances, which increases out-of-pocket costs for the tenant if a buildout is required,” Rowden says. “One area it is cropping up is that we’ve seen more leases signed in the last nine months in some of the recent sublease listings, many of those spaces strike a balance between quality newer construction with discounted rates because of the sublease.”