Views

Signs of gradual recovery in demand

Global Real Estate Perspective November 2023

Following another year of transition for many office occupiers in 2023, there are signs of a gradual improvement in demand as interest rates peak and many companies reach an equilibrium in office attendance or advance their objectives in driving higher office utilization. Global office leasing volumes in Q4 2023 increased by 13% from the previous quarter, and at nearly 9 million square meters reached the highest point since Q2 2022. All three regions saw activity rise over the quarter. Despite the increase, full-year volumes globally were still 9% below 2022 levels and nearly a quarter below the pre-pandemic average.

This article is part of JLL’s Global Real Estate Perspective

The global vacancy rate rose another 25bps in the fourth quarter to a new high of 16.2%, with the largest increase recorded in North America, followed by Europe and Asia Pacific. New completions are set to rise by 12% this year to over 17.3 million square meters before falling sharply to 12.4 million square meters in 2025, although this varies substantially by region. New groundbreakings have already slowed significantly in North America, while the pipeline in Europe and Asia Pacific will peak this year and is set to remain above long-term averages through 2026 before declining. Completing projects will push up overall vacancy through 2024, although newer-vintage and creative office space in vibrant locations will see availability decrease further.

Future trends: Demand starting to strengthen, with limited vacancy in premium space

Outlook for 2024: Over 80% of employees globally are back in the office at least one day a week, compared to 61% a year ago, with most employees now working from the office an average of 3.1 days per week. Attendance rates have increased consistently over the last year, even among the earlier adopters of remote-first policies: of the world’s 10 largest technology companies, 8 are now mandating a minimum of 3 days per week in the office. Greater clarity as utilization rates stabilize will empower companies to make longer-term decisions on their workplace plans. This should support a gradual increase in office leasing activity through the year as economic conditions improve.

Long-term: Many companies will face the challenge, despite markets with rising vacancy and subdued overall activity, that the flight to quality has created strong demand concentration in the top end of most markets, which are now increasingly tight. While the new construction wave is still peaking in Asia Pacific, many global markets in the West (especially the U.S.) will see office deliveries slow significantly due to costs and constrained financing options, further limiting high-quality space options over the next two to three years. The likely distress and potential capital crunch for existing office assets, along with some accelerated obsolescence, will create additional risks for occupiers in the coming years. As a result, rents across the top of the market will see strong growth, with the potential for double-digit annual increases in the highest-quality, well-located, dynamic and sustainable spaces.