Structural and cyclical uncertainty weighs on activity

The effects of heightened uncertainty around the economy, interest rates and working patterns continued to be felt in the office sector during the third quarter of 2023, particularly in markets where the cumulative impact of significant policy rate cycles is still building. Global office leasing volumes were level with Q2, but 6% lower year-over-year and 24% below the pre-pandemic Q3 average. The regions recorded mixed results with take-up in Asia Pacific 19% above Q3 2022, while year-over-year leasing activity fell by 15% in Europe and 12% in the United States. Occupancy losses increased to -1.4 million square meters as net absorption in Asia Pacific was offset by declines in North America and Europe.

The global vacancy rate rose another 35bps to a new all-time high of 15.9%, with the largest increase recorded in North America, followed by Europe and Asia Pacific. Project delays have now pushed the peak of the current development cycle out to 2024; there are over 16.7 million square meters set to complete globally this year, followed by a nearly identical total in 2024. New groundbreakings have already fallen sharply in North America, but the pipeline is set to continue climbing into 2024 in Asia Pacific, and through 2025 in Europe. Completing projects will push up vacancy over the rest of 2023 and into next year, but resilient demand for new and refurbished space is likely to result in a growing shortage of suitable new supply as the pipeline reduces from 2025 onwards.

Future trends: Tighter availability for premium space despite rising vacancy

Outlook for 2024: Slowing economic growth and elongated occupier decision-making are likely to keep aggregate leasing activity subdued through early 2024. But improving growth prospects, an uptick in tenant requirements in major markets including the U.S., upcoming lease expiries and lower renewal rates will support growing demand for high-quality space as the year progresses. Overall vacancy will continue increasing through the year as new supply is added and tenants upgrade, while availability in new, well-located space will remain tighter.

Long-term: Limited developer appetite and difficult financing will lead to global new supply falling below long-term averages by 2025. An increasing focus on new, premium space – especially for net zero carbon buildings, where there is an expected shortfall of 40%-80% across major cities in the U.S., Europe and Asia Pacific over the next decade – will contribute to spillover demand in retrofitted second-generation stock and continue to widen the performance gap between the best and the rest.