162,000 Jobs in August. Office-Using Employment Lost 24,000.
The report
Employers added 162,000 jobs in August, well above forecasts. Unemployment held at 4.1% and participation edged up to 61.6%. The gains came from restaurants and bars, local government education, construction, manufacturing and health care. Office-using sectors, meaning information, financial activities and professional and business services, lost a combined 24,000 jobs, with information leading the decline.
The office market data for the same month: year-to-date sales of nearly $43 billion across about 1,850 transactions at an average of $205 per square foot, with Manhattan at $5.1 billion the largest total in the country. Absorption has been positive on an annual basis for two quarters.
Why the two stories do not conflict
The economy is growing in the sectors that use warehouses, hospitals, schools and job sites. It is contracting, slightly, in the sectors that sign office leases. Information-sector job losses are concentrated in technology and media companies that are replacing headcount with software, some of it AI. Those companies were the office market's growth engine from 2012 to 2021. They are now its most active sublease landlords.
The positive absorption the office market has posted this year comes from tenants upgrading into better buildings and from inventory leaving the market through conversions and demolitions. It does not come from more office workers. That distinction determines which office you should own.
The buildings that win in a flat-headcount market
When tenant headcount is flat, leasing is a zero-sum game between buildings. The winners are the ones tenants move into when they consolidate: newer, better located, amenitized, with floor plates that fit a hybrid workforce. The losers are the buildings those tenants leave. A tenant going from 80,000 square feet in a 1985 tower to 50,000 in a 2019 tower is a positive-absorption headline for the market and a 80,000 square foot vacancy for the owner of the old building.
Class A rent growth of 3% to 4% is real. Class B rent growth is negative in most markets once concessions are counted. Class C is losing tenants outright. The averages in the market reports blend these three into a number that describes no actual building.
For owners of the buildings tenants are leaving
The choice is between capital and exit. Capital means a renovation that gets the building into the consolidation conversation: lobby, amenities, HVAC, and enough of a spec suite program to show what the floors can be. That costs $50 to $100 per square foot and only works in a location tenants want to be. Exit means selling to a converter or a land buyer at a number that reflects the building's next use, which in many suburban markets is data centers or housing. Either choice is better than a third year of 18-month free rent deals that fill the building with tenants who leave at the first renewal.
Build the expiration ladder and find the consolidation risk
In a flat-headcount market the tenants that leave are the ones whose leases expire, and the ones that consolidate are the ones with the most space per employee. Both facts are in the lease file and the tenant's own filings, and neither shows up in the market report. An owner who knows which 20% of the rent roll expires in the next two years, and which of those tenants have shrunk their headcount, knows where the vacancy is coming from a year before it arrives.
The expiration ladder comes from abstracting the leases, which is a day of software time instead of a month of paralegal time. The headcount signal comes from reading the tenant's public filings and press, which is a research task that language models do well and that no leasing team has time for. Put the two together and the renewal conversations, the backfill marketing and the spec suite budget all start early, which in a zero-sum leasing market is the only edge an owner has.