Any increase in a key measure of office demand in 2023 isn’t likely to occur, according to the latest projections from commercial real estate association NAIOP.
The difference in between tenant move-ins and move-outs of leased space could continue to slow into 2024 as net absorption is hampered by economic uncertainty, the trade group said.
The national office market absorbed 6.6 million square feet during the second and third quarters of 2022, but the vacancy rate continued its climb to 17.1%, the highest level since the third quarter of 1993, according to the NAIOP's "Office Space Demand Forecast" for the fourth quarter of 2022 published by the NAIOP Research Foundation.
The completion of new office space has outpaced absorption as tenants and investors have shown an appetite specifically for new high-quality office buildings, according to NAIOP. CoStar data dovetails what NAIOP reported. Multitenant office buildings of 25,000 square feet or larger have posted 37.3 million square feet of net absorption in the past 12 months, according to CoStar data. However, similar buildings built before 2018 have seen vacated space grow by 51.5 million square feet in that period.
This flight to quality is most likely driven by tenant preferences for flexibility and the desire to attract and retain talent, according to NAIOP. Occupiers are growing more cautious, opting to sublease space and choosing smaller footprints when leases come up for renewal. In addition, leading economic indicators point to growing risks of a recession in 2023, NAIOP noted.
Given these trends and concerns about a potential recession in 2023, net office space absorption in the fourth quarter is forecast to be 7.1 million square feet, with absorption in 2023 forecast to slow to 8.1 million square feet for the entire year.
Moving forward, the forecast projects that absorption in the first three quarters of 2024 will total 13.3 million square feet.
“A full return from remote working seems unlikely, but the office market will continue to adapt and evolve as new work patterns are established and the economy stabilizes,” Marc Selvetelli, president and CEO of NAIOP, said in a statement.
NAIOP is the latest group highlighting concerns about the office market. Office attendance has been edging lower almost weekly in the past month; and there has been growing concern over the outlook for loans backing office properties in the past month.