Average Size of US Office Leases Reflect the Current 'Move-and-Shrink' Trend

By Phil Mobley CoStar Analytics

In nearly every major market in the country, office tenants are executing leases that are smaller than what they presently occupy. This trend is particularly pronounced in West Coast markets with high exposure to tech-sector workers.

New leasing volume remained well below its five-year pre-pandemic quarterly average in the second quarter of 2023, driven by a shrinking average lease size. While the total number of office leases signed during the quarter was not far below that observed between 2015 and 2019, the average amount of space leased was nearly 20% smaller.

Smaller office leases have become more common in nearly every major U.S. office market, with average deal size down at least 10% everywhere except Houston and Orange County in California. Some locations have seen their average office lease size contract by much more. The Northern California markets of San Francisco, Oakland-East Bay and San Jose-South Bay all recorded average lease sizes more than 45% below historic norms, with Seattle close behind.

Similarly, second-quarter office leases were an average of 37% smaller in Boston and 32% smaller in Austin. These two markets also have high concentrations of tech workers, but until recently, their office sectors had been buoyed by other industries. In Boston’s case, demand for lab space was red hot until the middle of 2022. Austin, meanwhile, benefited from corporate expansions and relocations to business-friendly Texas. Now that leasing demand from both sources has pulled back, leasing trends in these markets is beginning to resemble that observed in other tech-oriented locales.

On the other end of the spectrum, office leasing volume exceeded pre-pandemic norms by a substantial margin in Houston and Miami, which continue to attract out-of-market tenants. Even in these cases, though, the average deal size was slightly lower than it was in the late 2010s. This bears watching closely, especially if economic uncertainty shuts off the corporate relocation spigot in coming months.

Multiple factors appear to be driving this phenomenon. One is that smaller office occupiers have become more active lately as they look to take advantage of market conditions and upgrade their office space by moving to higher-quality locations when their existing leases expire.

Another is the aforementioned 'move-and-shrink' behavior of larger office occupiers. These organizations are also choosing to relocate rather than renew and taking advantage of the opportunity to upgrade in many cases. However, as they move, many are taking less space than they previously occupied. The result has been widespread negative net absorption, or the net change in occupancy and vacancy, which is what the office market has continued to experience so far in 2023.

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