Office Trends
Occupiers continue to respond to slow employment growth and stable employee attendance by right-sizing their footprint to represent their current and projected needs. As a result, space continues to being given back and vacancy and sublease inventories push higher. Landlords continue to hold rents through aggressive TIs and concession packages, but there are signs that asking rents will drop in the next 12 to 18 months as the reality of true office demand pushes landlords to compete with growing sublease availabilities. More liquidity and further cap rate expansion are expected to exacerbate the situation. For investment-grade buildings, values are down around 40 percent since the end of 2021, exceeding what occurred during the Great Recession. An additional value correction over the next 12-18 months is expected as a steady stream of low-rate loans maturing into a high-rate environment.
Office Tenant View
- Competition for highly-amenitized space remains as occupiers look to re-invest savings on larger spaces for smaller, well-located office locales.
- New supply is tapering, with the lowest amount of new office construction starts (around 20 million square feet) the lowest on record.
- Cooling inflation means that the "soft landing" scenario is in play, bringing with it the prospect of lower interest rates that could ease distress for some owners and lenders. In this context, tactical office plays could prove shrewd.