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Physical office space remains in demand

Global Real Estate Perspective, November 2021

Overall sentiment and activity in office markets across the globe are improving, although at differing speeds. Third quarter global leasing volumes are 39% higher than a year ago; however, they remain 25% lower than Q3 2019, showing that the recovery, although underway, is far from over. All regions are below Q3 2019 volumes, with the U.S. lagging the most. On an encouraging note, global net absorption turned positive in the quarter for the first time since the onset of the pandemic.

Office re-entry rates still vary significantly by country, but are now starting to rise around the globe. This is important, as before new space requirements are cemented, corporates need more evidence of how hybrid office and remote work impacts their demand profile. Tenant-friendly conditions persist in most markets with landlords eager to attract tenants. However, rents for premium or prime buildings have edged up in some markets as occupiers increasingly look for quality. Vacancy continued its upward trajectory in Q3, adding 30bps over the quarter to 14.6%; that said, this is the slowest rate of increase since the onset of the pandemic.

Following delays to project completions last year, 2021 and 2022 are anticipated to be the peak of the development cycle. The picture fluctuates significantly by region. In the U.S., development completions are expected to hit a high point this year and then slow appreciably next year, while in Europe and Asia Pacific the pipeline continues to grow into 2022 by 24% and 13% respectively. This will add to the upward pressure on vacancy rates over the coming months.

Future trends: Flight to quality with a focus on sustainability and wellbeing credentials
  • Outlook for 2022: An ongoing improvement in market activity and sentiment is expected next year, with forward-looking indicators pointing to a more active 2022. As employees return to the office, there will start to be increased clarity around what the hybrid future looks like for occupiers.
  • Long-term: The flight to quality will continue as occupiers prioritize sustainability and wellbeing credentials along with good transport links and highly amenitized areas. Grade B and C buildings may face increased pressure to upgrade or risk potential obsolescence.