• Net absorption for U.S. office assets turned positive: +2.1 million sq. ft. Q2 2024 (JLL).

• Leasing velocity up 8% QoQ in top six urban markets.

• Vacancy rates steady at 16.9%, up only 10 bps versus Q1.

• Effective rent growth flat YoY but incentives narrowed by 3% on average.

• Institutional transaction volume rose to $10.7B in Q2, a 12% QoQ rebound.

U.S. office fundamentals surprised on the upside this quarter. Net absorption turned positive for the first time since early 2022, driven by targeted leasing in major urban cores. While vacancy remains historically high, the pace of deterioration eased, leading several investors to retest urban gateway markets. As incentives contract and capital re-engages, the office sector appears to be recalibrating underwriting standards. Volatility persists, but the narrative has shifted from distress to discipline.

Leasing activity in gateway markets demonstrated unexpected resilience, with New York, Boston, and San Francisco posting 5–9% higher lease volumes quarter-on-quarter. JLL reports that financial and tech tenants led growth, with a preference for recently repositioned buildings. “Clients want trophy assets with near-term delivery,” notes one Manhattan broker, referencing a 150-basis point premium for Class A space. In turn, bid-ask spreads have narrowed, but only for high-quality assets. Distressed assets, meanwhile, continue to languish. Caution, not exuberance, is pricing over risk.

Average effective rents remained flat year-over-year at $49.20/sq. ft., but headline incentives (free rent, tenant improvement allowances) fell by 3% compared to Q1. In practice, this signals landlord confidence in specific submarket fundamentals. CBRE adds that construction volumes are down 15% YoY, holding supply in check. Underwriting reflects “more discipline on cash flow projections,” as one institutional lender summarized. Pricing clarity is selective, but incrementally firmer.

Absorption numbers diverged sharply outside of core metros. Sunbelt and Midwest cities posted mixed results: Dallas-Fort Worth and Miami showed absorption gains (+830,000 sq. ft.), while Chicago and Houston lagged. As a result, excess sublease space persisted in many markets, restraining further rent growth. Investor appetite remains tightly focused. Secondary market risk premiums have not compressed alongside gateway improvements.

Institutional transaction volume climbed to $10.7B in Q2, up 12% from the prior quarter but still 35% lower YoY. Notably, more deals involved cash-rich buyers and convertible mezzanine debt. “Debt costs are sticky, but pricing is less opaque than last winter,” an asset manager remarked. Distress-driven sales comprised just 8% of volume, declining from recent highs. Capital is re-engaging—incrementally and with discipline.

If current absorption trends hold, select office submarkets could achieve rent stabilization by year-end. Still, vacancy rates remain elevated, and the Federal Reserve’s rate trajectory will dictate borrowing costs for refinancing and acquisitions. Office recovery is conditional: discipline in both underwriting and capital structure remains the necessary filter for deal flow. Construction starts remain limited, preventing an oversupply cycle. Should liquidity improve further, expect renewed attention on gateway assets—but caution will lead behavior until cost of capital meaningfully changes.