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Report: Office Recovery Slows in Q2

The U.S. office sector struggled during the second quarter of 2022, beset by contracting absorption and increased vacancies. Cushman & Wakefield, JLL and Newmark all reported sluggish momentum even in the face of improving public health conditions.

“A variety of factors are contributing to this softening, including general economic headwinds, continued delays in real estate decision making and downsizing among many firms undertaking real estate planning initiatives,” according to Newmark’s 2022 National Office Market Report.

Meanwhile, The JLL Office Outlook concluded that “the office market continued to face an ever-evolving series of headwinds during the second quarter,” which is shifting the dialogue from employee return to offices “to the effects of the highest rate of inflation in decades.”

Cushman & Wakefield’s U.S. National Marketbeat Office Q2 2022 indicated a more bifurcated market, noting that “depending on the geography, quality of the asset, location and floor plate, office space across the country is either thriving or continuing to struggle and beginning to look increasingly obsolete.

A continued trend into Q2 was the flight to quality, prompting JLL to point out that “since the onset of the pandemic, new supply has registered net occupancy growth of 86.8 million square feet, compared to the 246.5 million square feet of outflows in the rest of the market. Flight to quality will continue to drive tenant demand, “and will support tighter market conditions in top-of-market and well-amenitized assets,” according to Newmark.

The Newmark researchers indicated that, while pent-up demand for space continues to loosen, “for many office occupiers, remote work arrangements are likely to negatively impact the firms’ real estate needs.”

And while micro-markets and innovation-based submarkets are the “bright spots in a heavily patchy real estate environment,” noted JLL researchers, the record level of lease expirations in the second half of 2022 will need to be considered, “while shifting expectations for growth will keep companies at the drawing board when determining their real estate strategies.”

Cushman & Wakefield researchers offered a somewhat more optimistic outlook, pointing out that markets with positive net absorption are “being driven by strong tech and life sciences job growth. And while national vacancy is anticipated to remain elevated, it “declined in a third of U.S. markets and overall was up just 34 bps QoQ.”

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