The U.S. office sector continued its struggles during the second quarter of 2023, highlighted by ongoing negative net absorption, sublease space increases – and the belief that a recession isn’t necessarily “if” but “when.” Reports from five commercial real estate firms indicated that occupiers are bracing for the likelihood of an economic downturn. Most used the term “subdued” to describe what went on in Q2.

Both Cushman & Wakefield’s “Office Q2 2023 MarketBeat” and Plante Moran Cresa’s “U.S. Office Real Estate Market Summary | Q2 2023 note that a recession could arrive soon, as late as this year. As “another sign of recession concerns, occupiers continue to put significant amounts of leased space onto the sublease market,” Cushman & Wakefield analysts said. Sublease availabilities account for 2.9% of the total office inventory, representing “the most on record since Cushman & Wakefield began tracking this data in 2000,” the analysts added.

Meanwhile, tenants vacated nearly 40 million square feet more than they occupied, “putting 2023 on pace for the largest amount of negative net absorption on record,” the Plante Moran Cresa analysts said.

Lee & Associates’ Q2 2023 North America Market Report agreed with the large amount of office space that occupiers continue to shed, pointing to the sublease space as “the proverbial canary in the coal mine,” which could mean “an extended period of weakened demand.”

Regarding the outlook, Cushman & Wakefield analysts suggest that office vacancy has yet to peak, meaning it likely won’t start to fall until late 2024, “which is consistent with when we expect the economy to begin pulling out of the downturn.” Plante Moran Cresa suggests that the increasing amount of Class A product to be delivered to the market will “further tip the market in the tenant’s favor.”

Still, not everything appears to be gloom and doom. Plante Moran Cresa said that Class A office properties delivered since 2015 have experienced positive net absorption. And JLL’s “U.S. Office Outlook” was remarkably upbeat, pointing to improved leasing momentum across most markets, indicating,“signs that have emerged that the U.S. office market is beginning to turn a corner and is tentatively on the cusp of a recovery.”

The JLL analysts acknowledged that leasing volumes could be retrenching in the coming year. But ongoing back-to-work mandates will improve physical occupancies, especially during mid-week. Additionally, quality will be essential and “may see a long-term rise in importance in the office markets as employers have to motivate their workers more than ever in a challenging labor market,” the JLL report noted.