Markets remain active but momentum falters

The office market continues to be impacted by both structural and cyclical challenges, but the leasing markets were surprisingly resilient in the third quarter. Global office leasing volumes were up 10% on Q3 2021; however, there are signs that momentum is starting to slow with leasing 5% lower than the previous quarter. Additionally, global net absorption remained positive but was down 31% over the year. 

In most markets high-quality, premium assets are significantly outperforming the rest of the market as occupiers look to upgrade space. The global vacancy rate edged up 20bps to 14.5% in Q3, with the largest jump recorded in Asia Pacific followed by the U.S., while it kept stable in Europe.

Development completions have been elevated through 2022 and are expected to peak next year, boosted by an increase in new supply in Asia Pacific. Concerns around future demand levels combined with higher construction and financing costs are likely to mean that breaking ground on new developments will slow considerably across most locations. Refurbishments are likely to prevail as they are seen as a cheaper, quicker and more sustainable option. 

Future trends: Greater resilience in high-quality assets

Outlook for 2023: Current headwinds have yet to filter fully through to occupier activity, but there are warning signs that leasing in 2023 will be more subdued as some economies move into recession. New requirements are starting to trend down or become contractionary, and our view is relatively conservative as we move into 2023. However, the flight to quality is expected to help support demand for Prime and Grade A assets even in a more cautionary economic environment.

Long-term: The ongoing flight-to-quality trend will create further bifurcation in the market, with demand for high-quality Grade A space showing greater resilience. Grade B and lower assets will come under increasing pressure and, in some cases, may be unleasable in their current form. A push toward refurbishments and retrofitting is needed across most global markets.