Office/Occupier

Bifurcating market creating challenges for lower-quality assets

The slow and uneven recovery of the U.S. office market in the aftermath of the pandemic has created a deep divide between prime and secondary office buildings that will continue to widen in 2023. Demand for the best buildings in attractive locations will support rent growth in top-tier office towers. By contrast, there will be a smaller pool of tenants interested in older office buildings.

This bifurcation comes as both occupiers and landlords adjust to new working patterns. Tenants will continue to shed underutilized office space next year, adding to the already high amount of available supply. As such, 2023 will be a favorable market for tenants, especially those previously priced out of desirable submarkets or properties.

Figure 8: Office Supply & Demand

Source: CBRE Econometric Advisors, Q3 2022.

Hybrid work and office utilization in focus

The widespread adoption of hybrid work means that workers are spending less time in the office and companies are assessing what to do with their underutilized space. Many have put up excess space for sublease, though others have held back as they plan for future growth and strive to increase office attendance.

Office utilization rates likely won’t meet employer expectations next year. While most companies see office attendance as critical to their success, many workers want the autonomy to decide where and when they work. As companies find an optimal balance over the next few years, office utilization and the space needed per worker will reach a new equilibrium that could ultimately reduce demand for office space per employee by up to 15% from the pre-pandemic norm.

Figure 9: Employers' vs. Employees' Perception of Return to Office

Source: CBRE Office Occupier Survey, August 2022.

Tenants demand more amenities to attract workers

Tenants will demand more from their buildings in 2023 to better support activity-based work and increase productivity. High-quality and well-located office buildings with amenities that enhance employee well-being and engagement are poised to attract the bulk of occupier interest. Sustainable buildings that align with a company’s environmental and social targets will also have an advantage over the competition.

Older buildings with outdated amenities will struggle to attract tenants, leading to a glut of obsolete vacant space that will inflate the overall U.S. office vacancy rate. Historically, the supply of less desirable office space supported a structural vacancy rate of about 12%. This rate will likely increase in the long run unless some undesirable space is removed from the inventory by either demolition or conversion. While conversion activity will rise over the next few years, feasible office conversion opportunities represent a negligible share of total U.S. office inventory.

Figure 10: Office Conversions by Construction Status & Estimated Year of Completion

Source: CBRE Research, Q2 2022.

Demand stronger in Sun Belt markets, life sciences clusters and best-in-class assets

While higher interest rates, economic uncertainty and cost containment will influence occupiers’ future space planning and location decisions, they will also focus on office attraction to their employees. Fast-growing and popular Sun Belt markets, including Austin, Dallas, Miami and Nashville, will remain in favor. Growing demand among life science tenants, who generally don’t allow remote work, will buoy hubs like Boston, Denver and Salt Lake City. Best-in-class properties in otherwise hard-hit primary markets, including Manhattan and Los Angeles, will also garner more interest.

Supply will moderate as developers hit pause

High availabilities will keep developers and construction lenders on the sidelines in 2023. Less than 38 million sq. ft. is slated for delivery in 2023, down 27% from the five-year average. A thinning construction pipeline will reduce supply-side risks over the next few years, likely resulting in an acute shortage of prime office space in the long term. However, as underway projects deliver and occupiers try to sublease underutilized space, supply will eclipse demand, pressuring rents in 2023.

Occupiers focusing on quality and cost

Occupiers will strive to make long-term leasing decisions while navigating the uncertainties of hybrid work and its impact on future office utilization. Smaller and more agile corporate users will be the most active in 2023. Larger users facing lease expirations will seek efficiency and cost-saving opportunities. Many users likely will reduce their footprint but upgrade the quality of their space to better support new ways of working. Tenants and landlords will more closely collaborate to create workplace experiences that attract workers to the office.