In a world where the office is no longer just a physical location but also a symbol of adaptability and resilience, commercial real estate (CRE) owners and operators face unprecedented challenges. But they also face great opportunities.
How are you navigating this complex terrain to create a thriving environment? For more insight as you plan your next move, here are key data pulled from a roundup of current research. You’ll uncover the hidden opportunities and emerging trends set to shape where the industry is heading. This is your commercial office outlook primer.
Office leasing volume vs. rent rates
Occupier and investor caution is driving continued softening of office fundamentals in the United States, according to JLL’s recent Office Outlook report.
Office leasing volume in the U.S. fell 10.7% in first quarter of 2023 compared to the fourth quarter of 2022, marking the third consecutive quarter of slowing demand, according to JLL. Expiration volume will slow moderately in 2023 but remain elevated for the next three years, however. That’s because about one-third of leased spaces are set to expire between 2023 and 2026.
However, JLL’s research shows that leasing rates are holding strong despite challenging underlying market fundamentals. National asking rents continue to grow, reaching $38.96 per square foot in the first quarter of 2023. While that’s nearly flat (0.3% increase since the fourth quarter of 2023), it’s promising that owners aren’t slashing rent rates to drive demand. Demand for higher quality assets is a likely explanation (see below).
Top 5 industries leasing office space
As for the industries topping the leasing list, banking and finance has taken over the No. 1 spot, according to JLL. However, the financial industry isn’t without its challenges right now – from bank failures to layoffs as increasing interest rates slow a once-hot real estate market. It will be interesting to see how leasing activity plays out for the banking and finance industry throughout the rest of the year.
The banking and finance sector swapped places with the tech sector on the leasing list, which now takes the No. 2 slot. Although the tech sector is still topping the leasing list, its activity has fallen 53% since 2019, according to JLL. That should come as no surprise, as the tech industry has started the year by laying off tens of thousands of people. According to Crunchbase, over 130,000 workers in U.S.-based tech companies have been laid off so far this year. In 2022, nearly 100,000 jobs were cut in the tech sector.
Legal services, health, and government round out the top five industries for leasing activity as of the first quarter of 2023, according to JLL.
Hybrid work and the need for flexibility
Hybrid and remote work continue to take their toll on the commercial office sector. Even though spaces are leased, the concern is whether they will stay leased when it’s renewal time. According to the “2023 State of Commercial Office Report,” 89% of CRE teams in the commercial office sector say that at least some of their tenants have adopted a hybrid work model (defined as employees splitting time between the office and working from home).
The need for flexibility is growing. While it’s possible tenants won’t want to give up company headquarters completely, it’s likely they may look for more flexibility from their leases. In fact, 30% of office space is expected to include some type of flexible space by 2030, according to the Global Flex Space Report from JLL.
However, 46% of CRE teams in the commercial office sector aren’t sure how much of their building’s rentable square feet will change to accommodate flex space over the next two years, according to research. Figuring out the flex space equation could be a huge opportunity for the commercial office sector in the near-term.
Newer, high-quality office space drives demand
It’s true national vacancy rates are climbing, reaching a record 20.1% in the first quarter of the year, according to JLL. But although occupancy losses are still growing, the impact is not being felt among owners of newer office products.
“Even as companies have become more defensive over the past six months, net absorption in office product built from 2015 to the present continues to post consistent occupancy gains, with an additional 6.6million square feet of net absorption that has reached over 100million square feet since the onset of the pandemic because a sizable share of tenants have opted to expand or relocate into newer, higher-quality office assets,” JLL’s Office Outlook report states.
Available high-quality Class A or trophy space is scarce, according to JLL. Because of this, executed rents on leases signed over the past 12 months continue to climb. Base rent and effective rent have increased 16.4% and 16.5%, respectively, against the 12 months leading into the first quarter.
Looking ahead: Commercial office outlook
The data shows emerging trends for the office industry. But things could change at any moment. While the commercial office outlook is riddled with complexity, it’s clear that now is the time to take decisive action and position your properties for success.
To help you stay ahead of the curve, we invite you to watch the on-demand webinar, “Tips to Enhance Tenant Experience & Grow Occupancy in Office Buildings.” Hear expert insights from industry leaders who are ready to guide you in navigating the ever-changing commercial office real estate landscape.
Listen now and embark on a journey to transform your office properties into thriving, future-proof assets that exceed the expectations of your tenants and stakeholders alike.