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Q3 Office: Ongoing Bifurcation, Increasing Uncertainty

The national office market during Q3 2022 was marked by negative absorption, continued concerns and performance bifurcation. Economic headwinds are impacting occupier plans, which also is leading to an uncertain outlook.

Lee & Associates’ “Q3 2022 Market Reports” for North America pointed out weakening demand during the quarter “as employers remained reluctant to deliver unpopular return-to-office commands to workers . . .” The report indicated that another issue was the increase in sublease space to a record-breaking 230 million square feet.

An increase in sublease space ended up impacting absorption, as did economic headwinds. According to JLL’s “Office Outlook,” this is leading to a halt in expansion plans as well as “downsizing footprints to navigate the growing threat of recession.” And while job creation remains strong, “the correlation between job growth and office demand is currently tenuous, given that many businesses are still recalibrating workplace strategies to include more remote work,” said Cushman & Wakefield’s “U.S. National Office Q3 2022 MarketBeat.”

The other trend mentioned by the companies was bifurcation and flight to quality. “High-quality assets continue to attract disproportionate demand, which may be encouraging new development enthusiasm, even as the overall market continues to weaken,” observed Newmark’s Q3 2022 “National Office Market” report. “New construction space has been in higher demand, while delivery of new space is causing vacancies as more occupiers move to upgrade when leases expire,” Cushman & Wakefield said.

When it came to the outlook, Newmark’s analysts noted that while “pent-up demand is expected to loosen with time,” leasing activity will remain below pre-pandemic levels. Additionally, “emerging macroeconomic headwinds are likely to suppress office growth.”

JLL’s analysts believe that flight to quality will continue, while the increasing cost of capital “will increasingly hamper landlords’ ability to offer large concession packages.” This, in turn, could lower discounts between base and effective rents, especially on aging product. Still, an anticipated decrease in remote work should “help counterbalance companies that are slowing growth plans,” JLL added.

Cushman & Wakefield researchers indicated that uncertainty would impact tenant plans. Additionally, an economic slowdown will also mean a slowdown in construction. “This may result in a period of underbuilding new product, creating fierce competition for the newer product that does exist, and likely placing upward pressure on rental rates for this segment of the market,” the analysts added.

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Inside The Story

Cushman & WakefieldJLLLee & AssociatesNewmark

About Amy Wolff Sorter

I love content. I love writing it, visualizing it, and manipulating it to fit into different formats. I have years of experience in working with content, both as creator and editor. The content I create and edit provides assistance with many goals, ranging from lead generation, to developing street cred through well-timed thought-leadership pieces. Content skills include, but aren't limited to, articles and blogs, e-mails, promotional collateral, infographics, e-books and white papers, website copy and more.

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