Subdued activity as occupiers maintain caution

The effects of challenging economic conditions and an uncertain outlook continued to be reflected in office markets during the second quarter of 2023, with lengthy decision-making and limited large-scale requirements as occupiers maintained a cautious stance. Global office leasing volumes registered a 7% increase from the first quarter, which is typically the least active quarter of the year, but were 14% lower year-over-year. Global net absorption turned negative during the quarter as increases in Asia Pacific were offset by occupancy losses in North America and Europe.

The global vacancy rate rose another 30bps to a new record high of 15.6% in Q2, with the largest shift recorded in the U.S., followed by Asia Pacific while it stayed largely flat in Europe. Rising construction costs, project delays and limited new financing mean that 2023 is expected to mark the peak of the global development cycle. New groundbreakings have already fallen sharply in the U.S. and will slow in Asia Pacific following a record level of deliveries this year. Completing projects will push up vacancy over the rest of 2023, but an intensifying demand for new or refurbished space is likely to result in a growing shortage of adequate new supply as the pipeline reduces.

Future trends: Intensifying demand for new construction

Short-term: Leasing activity is likely to remain subdued as economic growth slows in major markets through the second half of 2023. Accelerating return-to-office mandates, upcoming lease expiries and lower renewal rates will provide additional impetus to demand for new, high-quality space, while vacancy in the broader market will continue to increase through the end of the year on the back of new supply additions and move-outs from older stock.

Long-term: A decline in construction starts and more stringent financing conditions will lead to new supply falling below long-term averages from 2025. Combined with intensifying demand for new space, this will contribute to a growing shortage of premium space as new supply vacancy reduces, encouraging greater rates of retrofits in second-generation stock to meet demand.