Snapshots

Occupancy loss becoming more concentrated in underperforming buildings

February 26, 2024

Contributors:

The office market downturn from the COVID-19 pandemic and ensuing cyclical disruption has been unique in the sense that the negative impact to demand has been heavily concentrated in underperforming assets – so much so that despite continued record levels of negative net absorption, the U.S. saw a lower share of office buildings lose occupancy in Q4 2023 than any quarter since the second half of 2017, as negative net absorption remains highly concentrated in functionally obsolete, transitional assets, while differentiated and high-quality assets have largely resisted demand-driven challenges.

The concentration of underperformance was not as prevalent during the GFC downturn: from 2008 through H1 2009, an average of 17.4% of buildings were posting negative net absorption per quarter—in the past three years the share of buildings losing occupancy peaked at 17.3% in Q3 2020. Since 2020, the average share of the office market posting negative net absorption has been slightly lower than the average over the past 20 years.

Vacancy continues to be concentrated in older-vintage, large-scale offices in challenged locations: less than 25% of the U.S. office market was developed since 2000 and significant shifts in both space utilization and locational preference over the past three decades leaves a large share of pre-2000s product with limited appeal to today’s tenants. A white paper recently published by Brookfield Asset Management highlights a major NYC law firm tenant within their portfolio that requires roughly 60% of the space per employee compared to 20 years prior as a result of technological advancements around telecommunications and file storage.

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Conversions are mitigating the rise in vacancy

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Class of 2023 graduates