Office market numbers pointing toward a permanent contraction—market wrap 2023

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CBRE released its Q4 numbers for the office and industrial sectors of the Salt Lake and Provo markets earlier this month, with year-over-year numbers for 2023 also becoming available.

The office numbers look bad, as post-pandemic shrinkage becomes less of a trend and more of a permanent new normal.

Let’s take a look at CBRE’s numbers for the office sector, with a summary of the industrial market report coming later in the week.

Office leasing activity

Office demand continued its decline in Q4 2023, with new lease signings down 51.3% in the Salt Lake – Provo market quarter-over-quarter. That completed a 22.2% drop year-over-year.

Sub-leasing continued to play an outsized role in leasing activity, consisting of 47.9% of all leases signed in Q4, while making up 22.7% of leases over the year 2023. With such a high percentage of total leasing, sub-leasing activity is clearly dominating new rental contracts signed, as they make up only roughly 6% of the market’s total square footage.

Absorption

Q4 saw positive office space absorption, but that was a bright spot in an otherwise dreadful year. 2023 Salt Lake – Provo total net absorption was negative to nearly a million square feet (983,390).

In Q4 that contraction was led by Class B space, which accounted for 90% of the negative absorption.

Vacancy

The dour numbers haven’t changed much since the Covid pandemic shift began in Q1 2020. CBRE reports “an unprecedented peak in vacancy and availability rates in 2023, concluding the year at 23.8% [Salt Lake] and 24.2% [Provo].

Vacancy and availability (which also counts sub-leases on the market) vary by office space class, with newer Class A buildings having significantly more success in filling space.

They also vary by submarket, with some suburban sites (West Valley, Southwest Valley) suffering vacancy rates near 50%.

Lease rates

Not surprisingly, rents are on the squeeze. Yet the market’s average direct asking rent has declined only slowly, dropping 0.8% in Q4 and only 1.8% year-over-year – landing at $26.27 FSG per sf in Q4 2023.

Class A rates fell 4.9% over the year across the market, due largely to sub-lease discounts. Sub-let rates averaged $24.24 in Q4, notching a 8.4% discount below the average direct asking rate.

Given the downward pressure of sublease rates, the report expects negative adjustment in average lease amounts to continue through 2024.

Development activity and sales

Both new construction and sales of properties have seen drastic drops. With demand down so precipitously, one wonders whether any new office product will dare to enter the market it the short-, medium-, or even long term.

Both new construction and sales of properties have seen drastic drops. With demand down so precipitously, one wonders whether any new office product will dare to enter the market it the short-, medium-, or even long term.

EDITOR’S NOTE: This story originally incorrectly referred to CBRE as Coldwell Banker RE.

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Posted by Luke Garrott

Luke Garrott, PhD, has published in The Salt Lake Tribune and the Deseret News, and written features for the Salt Lake City Weekly City Guide and The West View. A former two-term councilman in Salt Lake City's District 4, he lives in Downtown Salt Lake City and grew up in the Chicago area.