Office development declined to unprecedented levels in 2024. Just over 500,000 s.f. of construction broke ground in Q4, dominated by small-scale, pre-committed developments. The remaining pipeline declined by almost 40% YoY and has fallen by nearly 80% since 2019. Nearly 30 million s.f. delivered in 2024 – that will decline by about 20% in 2025 and then by almost 75% annually for two consecutive years. Conversions and redevelopments have been growing over a 20% annual growth rate since 2020, establishing record inventory removal levels for each of the past four years. In 2024, more than 37 million s.f. was taken offline or planned for removal, mostly comprising office-to-residential conversion projects. 13 of the 20 largest office markets in the U.S. have created new incentives for office redevelopments since 2020. The capital markets recovery has been methodical. Overall office investment volume increased by roughly 30% YoY, but single-asset traditional office sales increased by only 10% YoY, matching 2010 levels of liquidity. Notably, institutional groups and public REITs increased their acquisitions activity significantly in 2024, growing by 57% and 316% YoY, respectively. Open-ended diversified core funds' capital expenditure reporting shows more capex deployed on building improvements in the last 12 months than any period on record other than Q2 2019 – Q1 2020. The distress pipeline has not yet shown meaningful signs of a plateau. Office CMBS delinquency rates rose more than 250 bps since Q3. Distress-driven transactions were more frequent in 2024 and appear to be slated to grow in 2025, but strategies from new ownership may evolve. At the close of the year, the vast majority of large employers have established office attendance requirements. In the Fortune 100, 21% of employees are required to attend the office five days per week, 74% have hybrid policies requiring 1 to 4 days per week, 4% have other variations of hybrid, and just 1% of employees are fully remote. More companies are expected to gradually establish attendance requirements or incrementally increase them until office attendance largely resembles pre-pandemic norms, eventually settling on an average requirement of 3.5 to 4.0 days. The fourth quarter was the culmination of a strong year of progress in stabilizing the U.S. office market, but pressures remain. Leasing activity may experience some choppiness in the first half of 2025 amid a volatile policy outlook, but tenant requirement volume continues to trend upwards. Leasing volume is expected to grow by nearly 10% YoY in 2025. Leasing strategies will continue to skew towards renewals as newer availabilities disappear. Two consecutive quarters of meaningful reductions in availability are creating more certainty that vacancy rates will decline in 2025, likely by the first or second quarter of the year. Net absorption may fluctuate during the first half of the year but is positioned to improve considerably in 2025 and reach marginally positive totals for the full year. Despite the improvement of occupier markets in the past year, tenants are ultimately depending on improved capital flows to alleviate some of the pressures in the market. Most markets remain undersupplied with well-amenitized, highquality workspaces, despite high vacancy levels in commodity office space. Improvements in liquidity will allow suitable assets to transfer to new ownership that is positioned to deploy capital to upgrade properties and help fill the supply gap that is widening amid the lack of development activity. INDEPENDENT MARKET REPORT By JLL as at 31 December 2024 42 | MANULIFE US REIT
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