As this report is written around Independence Day in the United States, what better time to focus on a market which has dominated headlines about the office market for the past two years? The US is often described as a monolith market, with all trends affecting all locations. However, the country can see a wide variety of effects from different global trends across and between regions, and even cities.

To understand how the US is truly fairing in the face of global office headwinds, we spoke to the brokerage and research team in the US to tap into their deep understanding of this massive, and hugely significant, market.

Our contributor:

• How would you describe the health of the occupational markets? What are the key trends for US occupiers?

The flight to quality trend, while not new, still prevails with many deep-pocketed occupiers seeking out the best quality spaces with the latest and greatest amenities to attract and retain top talent.

Willing to pay top dollar, many financial services and legal services tenants are securing such quality spaces, and right-sizing their real estate footprints in the process. At the same time, there is a growing amount of available space on the market (both direct and sublet), which is putting upward pressure on concession packages and downward pressure on taking rents in what is a historically tenant-favourable market.

• Which sorts of occupiers are moving, where are they going, and are they generally seeking larger or smaller spaces?

A great number of occupiers that are moving now are doing so as the result of their lease expirations. So a lot of the activity is lease expiration-driven given uncertainty in the economy. In addition, for the leasing activity in total for Q2, renewals and expansions accounted for 49% of transactions – roughly an even split with new leases and relocations. Although the share of renewals was lower than last quarter’s 63.1%, it remains elevated. Again, this is all attributed to what we characterise as many occupiers still taking a ‘wait-and-see’ approach.

When it comes to occupiers actually moving or relocating, we have seen a good number of occupiers from the financial services and legal services industries making the move. In many cases when it comes to relocating to the higher-end
Trophy or Class A+ product, occupiers have been taking less space or shrinking their real estate footprint in the process, but they are securing the best-in-class space. Overall, however, we have seen some tenants taking more, some less and some the same amount of space – it all really depends on specific occupiers and their needs. These decisions are primarily driven by each company’s return-to-office policies and expectations for growth or contraction.

• What is the state of office inventory across the tier 1 markets? Is vacant space being re-let, converted, or pulled down altogether?

Here in the U.S., we track office availability, which is at record levels across most markets. Specifically for New York, the office availability rate is at a record 19.7%. The vacancy rate is at 15.6%. No matter how you look at it, excess inventory on the market is sitting unoccupied longer depending on the type of product (which I referenced previously). Some of this excess space is being re-let. At the same time, there have been some conversions from office to residential where it makes sense. For New York, Q2 2023 inventory is down by 3.3m sq ft and sits at 467.7m sq ft compared to 471.0m sq ft a year ago in Q2 2022. A good amount of this inventory has been converted to residential in the Downtown part of the market.

• How is the changing office environment affecting rents, particularly at the top end of the market? Does this differ from the more mainstream market?

Average asking rents overall are up modestly, with Midtown Manhattan Class A rents up 1.7% quarter-over-quarter, while Class B/C rents grew 0.2% over the same period. Preference among many occupiers for ‘trophy’ or Class A+ space continues to drive rents higher in that segment of the market, while occupiers are able to dictate terms to a greater extent for commodity Class A and Class B/C space. The overall bright spot is that there is a plethora of space options to suit the needs of all occupiers.

Outlook

• How are occupiers feeling about the coming six months? Are there bright spots by geography or industry?

For the next six months, some occupiers are transacting because they have to (where decisions are lease-expiration driven), while others continue to take a ’wait-and-see’ approach given economic uncertainty. Some hesitation remains due to occupiers still trying to sort out their return to office policies, and/or fears of a potential looming recession.

The bright spot across the entire country is that it is a great time to be an occupier and tenant, as the markets remain highly tenant-favourable for all industries where landlords are still generous in their concessions and are offering great deals. This too is also building- and landlord-specific, as the issue of maturing debt comes into play. If there is a landlord/owner with a lot of maturing debt on their building, the amount of concessions offered may begin to moderate. Currently, landlord concession packages continue to reach all-time highs, but future growth will be more limited as pressure from lenders mounts.

_{Read the articles within Spotlight: Savills Prime Office Costs – Q2 2023 below.}