Q2 2023 Occupier Outlook - Office

Economic Indicators Still Mixed

The U.S. economy has remained remarkably resilient as headwinds continue to gather. The Federal Reserve has slowed its increase in interest rates as inflation pulls back, despite job growth moving higher. The Fed has increased overnight lending rates by 500 basis points from zero in less than 18 months, the highest level in more than 15 years. A shallow recession may still be in the cards, but fears of a deep and prolonged recession appear to be diminishing. 

The consumer has been an important driver during the current economic cycle, but spending has slowed, and consumer sentiment remains below historic norms. Manufacturers have reported new orders have fallen, and the housing market has seen activity and sale prices drop. However, the service sector has been persistent, with demand for travel, entertainment, and dining helping to expand the sector. The overall employment market remains tight, with unemployment near historic lows.

Office Market Searches For Equilibrium 

Supply and demand continue to search for a balance as the office market grapples with changing work styles. Vacancy has passed 18 percent in Class A spaces, a historic high. With an estimated 50 percent of leases signed prior to 2020 yet to expire, there is plenty of runway left for additional office market correction. As companies negotiate with space planning and hybrid work scenarios, the trend has been for a reduction in the space per employee, as the ratio has dropped nearly 10 percent below pre-Pandemic levels. Additionally, this has taken place during a period of job growth. As a result, we are firmly within a tenant-favorable market.

Office Tenant View: 
  • Tenants in the market are experiencing longer times to find spaces as they navigate the financial health of buildings and landlords.
  • Flexibility in lease terms and length is becoming an important lever in the current office landscape as owners look to entice tenants.

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