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Demand for Prime Space Will Remain Strong

An economic slowdown in the first half of the year and the normalization of hybrid working arrangements will continue to limit office demand in 2024. CBRE forecasts that the overall office vacancy rate will peak at 19.8% by year-end as below-average leasing activity persists and new construction deliveries continue to come to market, albeit at a slower pace.

More than half of the respondents to CBRE’s 2023 U.S. Office Occupier Sentiment Survey said they plan to further reduce their office space in 2024. The flight-to-quality trend of recent years will continue to support demand for newer, prime office product with the best amenities. Since 2017, absorption in newer post-2010 assets has been positive and we expect this will continue in 2024. For pre-2010 buildings, absorption has been negative for the past four quarters. Quarterly demand for post-2010 buildings is expected to begin outpacing new supply added to the market by Q4 2024. A recent increase in tenants that are actively looking for space across major markets suggests that leasing activity will rise by 5% in 2024 but will remain between 20% and 25% below pre-pandemic levels.

Figure 8: Historical & Forecast Office Net Absorption, Completions & Vacancy


Source: CBRE Econometric Advisors, Q3 2023.


Less Availability of Prime Office Space

High interest rates and limited demand, along with record-high vacancy, will deter developers from breaking ground in 2024. The 36.1 million sq. ft. in total construction completions expected in 2024 would be the lowest annual amount since 2014. CBRE forecasts that average prime office asking rent will increase by as much as 3%, a slower rate than in recent years. However, the shrinking supply pipeline is expected to improve office fundamentals and reduce supply-side risk to vacancy.

Consistent Office Utilization Rates Will Aid Recovery

Nearly 40% of respondents to CBRE’s 2023 U.S. Office Occupier Sentiment Survey think office utilization will increase marginally in 2024, while 60% said they have already reached a steady state of office attendance. This suggests that more occupiers will be comfortable making long-term leasing decisions, resulting in a modest improvement in leasing activity.

Small occupiers with requirements of less than 20,000 sq. ft. made up 60% of leasing volume by count through Q3 2023 and will continue to account for the bulk of leasing activity. Smaller space requirements will boost the flexible office market, with more landlords offering flexible space options, such as pre-built spec suites, directly to tenants rather than through third-party operators.

Tenant-favorable market conditions will persist in 2024, as the margin between asking and taking rents reached a post-pandemic-era high in 2023. However, the spread is expected to narrow slightly in 2024, as asking rents are forecast to drop by 3.4% from their Q3 2023 average. Concessions in the form of free rent and tenant improvement allowances are expected to moderate in 2024 as asking rents decrease.

Live-Work-Shop Submarkets to See Strongest Demand

Office location, quality, flexibility and amenities will be more important than ever to attract occupiers. While economic headwinds and the prevalence of hybrid working will play a major role in occupiers’ decisions in 2024, those that do lease space will flock to submarkets with an abundance of walkable amenities that help attract and retain the best talent.

Hard-hit gateway markets, such as Manhattan, Los Angeles and Chicago, may recover at a faster pace than previous years and see increased demand in certain submarkets with a higher percentage of prime office space and amenities. CBRE surveys show that public transportation access is the most important building amenity for occupiers. To increase office attendance, companies will need to offer employees top-notch amenities both in and around the workplace, boosting demand in the most desirable and accessible submarkets.



More Office Conversions Expected

Many older buildings that lack modern amenities will struggle to attract tenants in 2024, so a higher percentage of them likely will undergo conversion to other uses. As of Q3 2023, approximately 8% of total U.S. office supply by square footage was less than 50% occupied. Even though vacancy is forecast to grow another 160 bps in 2024, we do not expect this statistic to materially change.

The federal government is supporting office-to-residential conversion projects through a program of grants, low-interest loans and tax incentives. While many conversion projects can be challenging from a cost and technical standpoint, a proliferation of local and federal government incentive programs will aid lenders in mitigating any risk.

Figure 9: Office Conversions by Construction Status & Estimated Year of Completion


Source: CBRE Research, Q3 2023.

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