60% Of Office Vacancies Are in 10% Of Buildings

JLL: 60% Of Office Vacancies in 10% Of Buildings

A recent study by JLL uncovers a surprising pattern: a significant chunk of office space vacancies is concentrated within a mere 10% of buildings.

The data: The study points out an intriguing phenomenon: over 60% of all office vacancies are concentrated in just 10% of buildings, showcasing a significant imbalance in how vacancies are distributed across properties. Conversely, nearly 40% of buildings report being fully occupied, highlighting a polarized market.

Zoom in: This trend highlights the uneven distribution of occupancy challenges within the office sector. Additionally, the share of buildings with negative absorption has fallen to 12.7%, the lowest proportion since 3Q17, and below the 20-year average of 14.4%. This indicates a more buoyant office market than the numbers might suggest at first glance.

Occupancy trends: The distribution of occupancy has seen its ups and downs, with a peak in the latter half of 2020, where 17.3% of office buildings noted occupancy declines. The shift towards newer, amenity-rich offices by early-stage companies has left older buildings grappling with adaptability issues.

Top-shelf demand: Office leasing activity showed a promising increase in Q4, with a 14% quarter-over-quarter rise to 57.1MSF. Active tenant requirements have also been on the rise, indicating growing demand in the office market.

➥ THE TAKEAWAY 

Why it matters: The office sector is gradually regaining its footing, with attendance climbing to 51.8% by late February. Properties that meet the evolving demands for advanced amenities and lifestyle features are in a better position, though they represent a small slice of the market. JLL's latest findings, including a boost in leasing activity and tenant interest, suggest a shift towards a more selective demand in Class A office spaces.

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Brokerages Show Signs of Recovery Amid CRE Struggles

Towards the end of 2023, while some CRE brokerages faced challenges, others welcomed the new year with positive results. 

What happened: Despite the challenges posed by the pandemic's work-from-home shift and rising interest rates, many CRE brokerages reported notable improvements in the final quarter of 2023. CBRE exceeded analysts' expectations, Newmark showcased a significant leap in net income, and Cushman & Wakefield recorded a modest uptick in leasing activities.

Between the lines: These developments suggest a potential upswing in CRE markets, as observed by Piper Sandler's Alexander Goldfarb, who believes the debt markets are gradually recovering, indicating a possible end to the downturn.

Financial health: CBRE led the pack with a staggering 500% increase in Q4 net income year-over-year, while Newmark and Colliers also posted impressive earnings. Despite a challenging year, Cushman & Wakefield managed to secure a profitable fourth quarter. The success of these firms is attributed mainly to their focus on diversifying revenue streams, particularly towards service and management sectors, which have shown resilience in the face of market volatility.

Diversification pays: The shift towards recurring revenue from management and consulting fees has proven beneficial for brokerage firms. CBRE, Colliers, JLL, and Cushman & Wakefield all reported growth in this area, underscoring the importance of revenue diversification in navigating commercial real estate cycles effectively. This approach has not only helped firms withstand the past year's challenges but also positions them favorably for future gains.

Challenges and opportunities: Despite the optimistic outlook, not all firms fared equally well. Marcus & Millichap, for instance, struggled with profitability as the investment sales business waned. However, the company's CEO, Hessam Nadji, noted a narrowing gap in asset pricing, suggesting an impending market correction that could revive buyer and seller activity.

➥ THE TAKEAWAY

Looking ahead: The brokerage industry's ability to weather the storm without resorting to further layoffs or cost-cutting measures beyond those initiated in 2022 speaks to the sector's resilience. Looking forward, executives are hopeful for a rebound, particularly in the latter half of the year, as more companies finalize their space requirements and capital market conditions potentially improve with anticipated adjustments in interest rates.

According to the latest Burns + CRE Daily Fear and Greed Index, 66% of commercial real estate investors are on pause as they wait for more certainty on the timing of rate cuts.

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