Office use did increase in fall 2022, as companies encouraged employees back to the office. Additionally, job postings continued strong (despite layoffs among some sectors). But the big office news in Q4 2022 was the growth of sublet space on the market.

The reason for this trend is continued tenant uncertainty in light of increased costs of capital and labor, said analysts in Cushman & Wakefield’s U.S. National MarketBeak Office Q4 2022 writeup.

“Occupiers returned more space to market, which had an impact on vacancy increase,” according to CBRE’s Office Q4 2022 report. JLL’s Office Outlook/United States Q4 2022 took this one step further, nothing that tenants continued offering sublet space in cost-reduction moves. “Tenants are being very cautious, due to increased costs of capital and falling valuation,” the JLL analysts added.

On the other side, Stephen Newbold, National Director of Office Research for Colliers noted that “sublease space will remain a cost-competitive, short-term option until there is greater clarity on business direction.”

Meanwhile, the office market, as a whole, remains bifurcated. “The Trophy and high-quality Class A segment continues to defy overall trends,” according to JLL. As a result, landlords of such properties have been able to preserve their asking rates, explaining the slight uptick in overall rent growth.

Yet Collier’s Newbold pointed out that a large gap remains between ask and effective rent rates on most office properties, due to landlord concessions. Transwestern analysts agreed, pointing out that effective rents remain under pressure as landlords continuing to offer above-average concessions. But such concessions might be under pressure “as select over-leveraged and ill-leased landlords encounter challenges as loans come due,” the company’s analysts added Transwestern’s Commercial Real Estate U.S. Market/Office report.

As for the outlook, Cushman & Wakefield analysts anticipate that “as new construction deliveries slow down, expect demand to move to available sublease in high-quality office buildings.” Cushman & Wakefield also anticipates continued elevated vacancies and to “look for a quicker recovery in markets that have seen population and job growth,” as well as less sublease space and a lighter construction pipeline.

Transwestern’s take is that many companies with space up for renewal “are befuddled regarding how to reduce space for remote work, while also preparing for financial needs.” The firm’s crystal ball indicated that a construction decline should mean a better supply/demand balance. Still, “recovery will take several quarters, given the sizeable oversupply, and weakness in the sublet markets will remain challenging,” Transwestern analysts commented.

Colliers’ Newbold commented that the current vacancy rate remains below the high experienced during the Great Financial Crisis. However, “It will equal this level by mid-2023 if the current price of vacancy increases is sustained,” he said. And those vacancies are likely to continue well into the remainder of this year. “Pending a resurgence in demand, vacancy rates and sublease activity are set to continue to rise over the year ahead, placing increased pressure on rents,” Newbold said.