(September 18, 2024) -- CBRE reports that although slightly more office leases are being signed than before the pandemic, occupiers favor renewals rather than relocations and are taking less space. For those that are signing new leases, prime space is preferred.
CBRE’s analysis of H1 2024 office leasing data reveals the following trends:
- Renewals accounted for 42% of office lease transactions vs. 31% pre-pandemic.
- For renewals, the average lease size fell by 21% vs. 32% for new leases.
- Prime buildings,1 which comprise only 8% of total U.S. office inventory by square footage, have accounted for 12% of total leasing volume since 2021.
- Leasing activity is expected to increase later this year and into 2025 as occupiers gain greater confidence in making real estate decisions amid a resilient economy.
Occupiers signed slightly more office leases in H1 2024 (3,166) vs. the 2018 and 2019 H1 average of 3,136. Despite this uptick, the average lease size was 27% smaller than before the pandemic. Economic uncertainty, in conjunction with structurally lower demand due to hybrid work, has softened demand for space.
The average lease size decreased more for new deals (32%) than for renewals (21%) in H1 2024 compared with the pre-pandemic average. With a higher share of lease renewals (42% in H1 2024 vs. 31% pre-pandemic) and less downsizing among renewals, occupiers are cautiously leveraging existing landlord relationships while adapting to new work patterns. This trend is partly due to large occupiers favoring renewals. CBRE’s 2024 Americas Occupier Sentiment Survey revealed that 92% of large occupiers with more than 10,000 employees were considering or executing a renewal vs. 80% overall and 47% of small occupiers with less than 1,000 employees. Large occupiers tend to be more successful in renewal negotiations because landlords are motivated to avoid a sizable vacancy.
Figure 1: Average Office Lease Size
Note: Analysis includes all office leases of 10,000 sq. ft. or more.
Source: CBRE Research, Q2 2024.
For those that are moving, most are upgrading their space: 59% of respondents to CBRE’s 2024 occupier survey are considering or executing a relocation to higher-quality space. As a result, newer amenity-laden buildings are accounting for an outsized share of leasing activity compared with older commodity buildings. Prime buildings comprise just 8% of total U.S. office inventory by square footage but have accounted for 12% of total leasing volume since 2021.
In gateway markets, where leasing activity has been sluggish, prime buildings accounted for a relatively high share of total volume since 2021, particularly in Philadelphia (26%), San Francisco (23%), Dallas-Ft. Worth (20%), Seattle (19%) and Atlanta (18%).
Figure 2: Share of Total Leasing in Prime Buildings, 2021-2024
Note: Analysis includes all office leases of 10,000 sq. ft. or more.
Source: CBRE Research, Q2 2024.
New leases in prime office buildings have been for longer terms than those in non-prime buildings. Between 2021 and 2024, the average prime lease term was 107 months vs. 86 months in non-prime buildings. Occupiers are motivated to sign longer terms to secure tenant improvement allowances in prime spaces. Tenants in non-prime buildings have leveraged the higher availability of space to negotiate more flexible terms and concessions.
Demand for prime office space has been driven by the legal, technology and finance sectors. Thirty-four percent of legal sector leasing since 2021 was in prime buildings, followed by 16% of tech and finance sector leasing. The government, education and health sectors, which are typically more cost-sensitive, are bigger drivers of commodity office leasing.
Figure 3: Share of Leasing in Prime Buildings by Industry, 2021-2024
Note: Analysis includes all office leases of 10,000 sq. ft. or more.
Source: CBRE Research, Q2 2024.
Leasing activity should increase later this year and in 2025. More tenants are looking for space in major markets in anticipation of lower interest rates and greater clarity around office utilization.
1 Prime office buildings are considered best in class in terms of design and offerings, with an emphasis on occupant productivity and well-being. They are typically newly constructed or extensively renovated and offer highly sought-after amenities, including ample parking, strong security measures, fitness centers, social lounges, outdoor spaces, coworking areas, diverse dining options, touchless technology and sustainability features. Prime buildings are strategically located in desirable neighborhoods and often near public transit or major thoroughfares, providing easy access to walkable amenities and supporting shorter commutes.