- Demand Drivers: The Federal Reserve’s efforts to combat inflation have modestly slowed employment growth, but overall, labor markets remain in expansion. National GDP growth was robust at 3.3% in the fourth quarter of 2023, a decline from 4.9% in the third quarter of 2023. National office-using employment is now 6.4% above December 2019 levels, with the recovery being led by technology, advertising, media and information companies. Accordingly, technology companies drove much of the leasing activity over the last two years; however, in 2023, technology companies accounted for just 10.1% of leasing activity, down from 36.9% in 2022.
- Labor Market: National nonfarm employment recovered to pre-pandemic levels in June 2022 and is up 20.9% from the pandemic low in April 2020. Office-using employment was less impacted during the pandemic and has maintained a consistent pace of recovery, measuring 1.9 million jobs above pre-pandemic levels.
- Leasing Fundamentals: Net absorption continued to contract in the fourth quarter of 2023, driven most strongly by the West and East. Leasing activity was again sluggish in most markets in the fourth quarter of 2023, decelerating nationally to an estimated 0.8% of inventory, compared to the quarterly average of 1.4% realized between 2011 and 2019.
- Regional Fundamentals: The South Region recorded minor occupancy growth in the fourth quarter of 2023, the first region to realize positive net absorption since the third quarter of 2022. Gains here were driven by strong performance in the Houston market, where net absorption totaled positive 1.5 million SF during the quarter. Despite this, occupancy declined overall in the South over the course of 2023. Minimal leasing activity as a percent of inventory was relatively ubiquitous across most regions, indicating a slowdown in the momentum that had been gained in the prior two years in some secondary and Sun Belt markets.
- Market Size Comparison: Gateway markets shed the majority of space in the fourth quarter of 2023; over the course of the year, losses in major gateway and secondary markets were comparable. Tertiary markets outperformed other categories, recording minor positive net absorption in the fourth quarter of 2023. Occupancy ultimately declined over the course of the year, aligning with trends seen in other markets.
- Segmentation Analysis: Quality office assets continue to command a disproportionate share of the market’s limited activity, with leasing activity in the Class A sector accounting for 53.1% of all leasing in the fourth quarter of 2023. This has declined from a recent high of 54.6% in the fourth quarter of 2021. Class A vacancy increased 220 basis points year over year, in line with the overall market. There is growing segmentation in this top tier with commodity Class A (four-star) inventory recording vacancy that was 180 basis points higher than trophy (five-star) at the end of the fourth quarter of 2023. This difference has increased 110 basis points since the end of 2019.