U.S. office vacancy rates rose to 17.5% at the end of the first quarter of 2024, a post-COVID-19 high. This is the second consecutive quarter that the vacancy rate has exceeded 17.0% and represents a 40 basis point increase from the end-2023 vacancy rate. A year ago, the vacancy rate was 16.2%. The Class A vacancy rate was 20.4%, up 130 basis points over the past year.
More than 20 million square feet was returned to the market in the first quarter, split almost evenly between Class A and Class B. However, net absorption in the quarter was not as low as in the first quarter of 2023. The majority of new leases signed represent space contraction as tenants continue to adopt different workplace occupancy models than when they signed their previous leases.
Average all-class asking rents were $36.94/square foot (FSG) at the end of the first quarter, up 0.3% quarter-over-quarter and 2.5% from a year ago. The availability of 11.7 million square feet of higher-cost new space, much of which was not pre-leased, was the major driver of rent increases. Class A asking rents were $42.39/square foot, up 0.1% quarter-over-quarter, the smallest quarterly increase in the last 18 months. Class B average asking rents were $30.26/square foot, up 0.1% quarter-over-quarter and up 3.5% from a year ago.
The Mortgage Bankers Association projects that $385 billion in office debt will come due by 2026. Refinancing this debt will require loan repayments. Problems are already emerging and will get worse. This could reset the cost base for new owners, allowing them to lower rents and get below market rates.
The economy remains strong with solid job growth, low unemployment, and healthy consumer spending. Inflation has declined and stabilized since the Federal Reserve's 2023 actions. Interest rate cuts were expected in 2024 but may be delayed for several months until inflation falls further. The unemployment rate was 3.8% in March 2024, 10 basis points lower than in February but up 30 basis points from March 2023.
Overall, the U.S. added 303,000 jobs in March 2024, up 1.9% from a year ago. Private education and health services employment had the highest growth, increasing 4.3% from March 2023 to March 2024. Of the three office-based sectors, two — financial services and professional and business services — saw employment gains year over year. However, information sector employment fell 1.2%, the largest annual decline of all U.S. sectors. Year over year, Las Vegas, Miami, Sacramento, Austin and Raleigh had the fastest metro area job gains in the first quarter.