Gradual recovery in demand continues

Global office leasing activity continued to strengthen from subdued 2023 levels during the second quarter, with volumes 10% above levels from a year earlier. Performance was mixed across regions as a brighter economic outlook and stabilizing hybrid work policies contributed to increases in the U.S. (+19% year-over-year) and Europe (+4%), while volumes edged lower (-2%) in Asia Pacific amid cost concerns and lower availability in several key markets. Slowing occupancy losses in the U.S. and positive absorption in Europe and Asia Pacific in Q2 helped global net absorption reach its highest level since the start of 2022.

The global vacancy rate inched higher to 16.6%, rising by 10bps across all three regions. New completions in 2024 are set to fall slightly from last year to 15.2 million square meters before declining an additional 18% next year, as higher construction costs and limited financing slow the development pipeline. New groundbreakings have fallen to their lowest level on record in the U.S. over the last 12 months and supply will also slow in Europe going into 2025, although new deliveries will stay above historic averages in Asia Pacific. Overall vacancy is expected to continue rising, but as leasing activity gradually improves further and tenants focus on upgrading their portfolios, availability for in-demand space and locations is decreasing in many markets.

Future trends: Declining availability of new space in mature markets despite rising overall vacancy

Short-term: Occupier sentiment is improving in many markets as the economic outlook brightens, interest rate cuts are put into effect or anticipated during the second half of 2024, and labor markets remain healthy. Active tenant searches continue to increase from 2023 levels in the U.S., while there has been a rise in large-scale requirements in Europe. In Asia Pacific, robust demand in higher-growth markets such as India and an elevated supply pipeline are supporting activity. This should enable a continued gradual increase in office leasing volumes through the year, although overall vacancy will keep rising on the back of tenant downsizing in the U.S. and new supply in other regions.

Long-term: As leasing activity improves further and tenants focus on upgrading their portfolios, the availability of in-demand space and locations is declining in many markets. Fewer options and a desire to avoid high fit-out costs are already translating into a higher share of renewals on lease expiry. With high levels of pre-leasing, occupiers in the U.S. and Europe in particular are facing more urgency to avoid delays and start searches earlier to ensure they can find appropriate space.