U.S. Office Transactions Rise 22% in 2024 as Hybrid Work Takes Hold

The U.S. office market saw $25.8 billion in office transactions in the first half of 2024, up 22% from 2023, but still more than 50% down from pre-pandemic levels. 

This recent surge in office sales, however, was primarily attributed to an “entity-level medical office portfolio,” according to JLL’s Q2 2024 US Office Market Dynamics report. It’s revealed that most buildings sold during this period continue to, “reflect deep discounts from recent valuations.” 

Despite the promising upswing in sales, the capital markets have not mirrored the same recovery pace seen in office leasing. This difference highlights the complex relationship between sales growth and the broader economic and financial factors influencing commercial real estate markets in the U.S. 

Investors in U.S. commercial real estate markets have their eyes on the Federal Reserve, where many expect potential rate cuts later this year will help stabilize and boost capital markets. 

JLL reports that a significant acceleration in office sales depends on an improved interest rate outlook — which is expected to lower capital costs and stabilize asset valuations. 

“[T]raditionally in past downturns, high availability of sublease space puts downward pressure on rental rates, and sharp declines in asset valuations typically allow new owners to cut rents and still achieve desired returns,” according to the report. “Although the sales market has seen limited liquidity, higher prevailing interest rates in the upcoming cycle may limit landlords’ ability to cut rents amid higher financing costs, even in the event of reset bases.” 

As hybrid work becomes the norm across the U.S., both tenants and landlords are adapting their strategies this year to avoid high capital costs. The preference for low-capital options like renewals, extensions, and subleases made up nearly 60% of leasing volume over the past year.  

In the first half of 2024, the number of new subleases decreased by 32% compared to 2023. Despite this decline, the overall number of subleases available is still relatively high. This suggests that while fewer new sublease spaces are being added, the total amount of sublease space on the market remains significant. 

JLL projects that the Federal Reserve is likely to cut interest rates by 50 basis points by the end of 2024. This would be a move that would relieve some of the financial pressures currently hurting commercial markets.  

In Q2, groundbreakings increased modestly to 2.1 million square feet. However, JLL reports that over the past year, the U.S. has experienced the lowest volume of office construction starts on record. Since 2019, the overall pipeline has decreased by nearly 70%, dropping to 46 million square feet in Q2 — with 65% of that space already pre-leased.  

It’s reported that of the 16 million square feet of new space scheduled to enter the market, most will be completed within the next four quarters, leaving minimal new deliveries planned for 2025 and 2026. 

$500 billion in loan maturities slated through 2028 are also expected to support an increase transaction volumes. This substantial volume of loan maturities could inject additional liquidity into the market, which could drive further growth in office sales. 

The U.S. office market is facing unique challenges driven by the rise of flexible work, economic pressures, and evolving tenant requirements. While leasing activity shows signs of recovery, downsizing and the preference for low-capital leasing options continue to shape the market.