Lease terms are lengthening for U.S. offices amid signs that the market is continuing to recover, according to JLL’s new Office Outlook research for the first quarter of 2022. JLL found that average lease terms in the first quarter rose to 8.2 years, up 30 basis points from the fourth quarter of 2021. Lease deals 10 years or longer now account for 51 percent of all activity, the first time these transactions have comprised more than half of office leasing volume since the pandemic started.
JLL’s report indicates that new office supply continues to capture outsized demand. More than 20 percent of leasing in the first quarter of 2022 was in buildings delivered since 2015, even though these newer buildings represent just 12.8 percent of inventory. Older buildings (1970-1999) represent 60.4 percent of national inventory but captured 38.6 percent of leasing.
A major theme of JLL’s report was that the flight to quality isn’t slowing down. Total vacancy rose by an additional 20 basis points in the first quarter of 2022, pushing it to a new high of 19.9 percent. But that’s not exactly happening in newer buildings. Vacancy in new supply fell by 10 basis points to 18.8 percent, and it’s lost nearly 100 basis points since the third quarter of 2021.
Along with the flight to quality, office concessions remain high, too. Asking rents were 0.2 percent above pre-pandemic levels in Central Business District Class A buildings in the first quarter. But JLL reports that effective rents in that segment are still 5.1 percent below where they were at the end of 2019.
The office market still faces great uncertainty, but there are glimmers of hope. Clarity around hybrid work is forming, enabling tenants to predict long-term space needs better. Market momentum is also building, as gross leasing volume increased by 5.4 percent over the first three months of 2022. That’s the 5th consecutive quarter of improved office tenant demand. The office market still has a long way to get back to full health, but it doesn’t appear to be in the dire straits some have predicted.