Dive Brief:
- In-office occupancy, a measure of people physically going into the office, rose to the highest level in November since the pandemic began despite challenging macroeconomic conditions in the office sector, according to a report from New York City-based commercial real estate advisory firm Newmark.
- Those macroeconomic challenges will likely cause overall investment activity in the office sector to slow further, according to the report. In the third quarter of 2022, office investment activity decelerated once again, down roughly 6% quarter over quarter.
- “I think it’s a good time to be conservative with your underwriting,” David Bitner, executive managing director of global research at Newmark, told Construction Dive. “We will see a broader deceleration in development activity.”
Dive Insight:
Tech slowdowns continue to affect the commercial construction market, particularly the outlook for the U.S. office market.
Technology companies accounted for 40.5% of all leasing activity through the third quarter of 2022. That means hiring freezes and slower growth expectations in the tech sector are beginning to take a toll on the office construction market outlook.
“The bigger issue actually is that [tech] firms would lease more space than they needed at the time of the lease to give themselves substantial room to grow,” said Bitner. “Now, in this current macroeconomic environment, they’re expecting to grow less.”
The pace of deliveries decreased modestly in the third quarter of 2022 but remains consistent with pre-pandemic levels. Future deliveries are likely to slow, according to the report.
Meanwhile, despite more people physically going into offices, the overall office vacancy rate reached 17.6% in the third quarter of 2022, the highest level in more than a decade, according to the report.
“I think [the report] is a mixed reflection. We were expecting to see vacancy continue to rise for at least a few more quarters,” said Bitner. But now, “office fundamentals are not particularly favorable over the next couple of years.”
Luxury offices favored
Office space under construction peaked in mid-2019 at over 110 million square feet, but that has since decelerated to about 80 million square feet, according to the report. Though the pipeline rose modestly in the third quarter of 2022, Newmark analysts expect a downward trend in the coming years.
But not all office buildings share the same negative trajectory, particularly as tenants continue to support a “flight to quality” trend, according to the report.
For example, higher-quality, class A buildings in suburban markets have performed better than central business district office markets thus far in 2022, according to the report.
“I would be really filtering for markets that have growing workforces,” said Bitner. “Trophy space is going to continue to be able to find tenants.”
