Decline in NYC Office Availability Signaling Bottom?

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Decline in NYC office availability signaling bottom?; Suburban shift: migration trends drive higher rent growth outside major cities; vacancies plague Texas office despite in-person return; and bond market rout signals end of free money era. Let’s delve into today’s topics.

📈 Market Update

🏢 Decline in NYC Office Availability Signaling Bottom?

The largest decline in available office space in New York City since the start of the pandemic may indicate the market is nearing a bottom. Though new leasing activity remains weak, the over 4M SF drop in vacant space in Q3 was driven by less space coming to market rather than new demand. This pause in listings, along with shrinking sublet availability, suggests owners are growing cautious about adding space amid signs of stabilizing demand. However, with construction ongoing and office utilization fluctuating, it remains unclear whether the bottom has actually been reached.

📈 Suburban Shift: Migration Trends Drive Higher Rent Growth Outside Major Cities

Suburban counties near cities like Phoenix, Houston, Dallas and Miami have seen notable population and rent growth over the past year. More affordable markets like Jacksonville, NC, Naples, FL and Bloomington, IL top the list for rent growth since late 2019. In contrast, rents in major metros like San Francisco, New York and Los Angeles have risen modestly. The trends illustrate how the pandemic has boosted demand and pricing power more in lower-cost, suburban areas versus the urban cores of major cities.

Top Suburban Growth Markets:
The strongest rent growth from Q4 2019 to Q3 2023 has been concentrated in smaller metros and suburban counties. Markets like Jacksonville, NC (34%), Naples, FL (22%), and Valdosta, GA (21%) have experienced rent increases over 20%, well above the single-digit gains in major cities. Slower growth has occurred in dense coastal cities like San Francisco and New York and energy hubs like Midland, TX, reflecting pandemic migration patterns. The data illustrates how the pandemic has accelerated the shift in rent growth away from major urban cores toward their suburban peripheries.

👎️ Vacancies Plague Texas Office Despite In-Person Return

Despite leading the country in office attendance, Texas paradoxically has the highest office vacancy rates among major US cities, with Houston, Dallas, and Austin all above 24%. Decades of overdevelopment, suburban flight, and slack regulation have left the state oversupplied with aging buildings, deepening an imbalance that remote work has only moderately exacerbated. With occupiers gravitating toward newer urban offices, vacancies may worsen as leases on outdated suburban offices expire. Texas exemplifies how the office market's weakness owes more to a long-brewing supply glut than the pandemic work-from-home shift.

⬇️ Bond Market Rout Signals End of Free Money Era

The worst three-year stretch for US bonds in over 200 years underscores a seismic shift in financial conditions as the era of free money fueled by central bank stimulus comes to an end. With the Federal Reserve halting bond purchases to combat inflation, yields have surged, imposing higher borrowing costs that have already felled some lenders. Investors worry huge deficits amid rising rates risk destabilizing parts of the economy, though default remains unlikely. The bond rout marks the revival of market forces and a reckoning for policymakers and consumers alike that the abnormal low-rate environment post-2008 was an aberration, not the new normal.

✍️ Further Reading

• What If WeWork’s Lease Talks Fail? Here’s What Happened to Other Coworking Firms (CS)

• Blackstone, Boston Properties Sell DC Office for $305M (RD)

• Financing Harder Than Ever to Get (GS)

• The State of Multifamily Lending (GS)

• Market Pulse: Bond Bears Feast on Jobs Data (Trepp)

• Five Million Homes Vacant While US Grapples With Housing Shortage (RD)

📊 Chart of The Day