Global office markets: occupancy levels continue to rise
Occupiers seek to upgrade their offices for post-pandemic work styles.
5 minutes to read
The soon to be published Q4 edition of the Knight Frank Cresa Global Corporate Real Estate Sentiment Index provides a clear indication of the tone and short-term trajectory of global office markets.
Occupiers are nervous and whilst they recognise the need to upgrade or reset their offices for the post-pandemic world of work, their ability to do so over the early months of 2023 would appear constrained.
This will put global office markets back into the staccato rhythm seen over recent years, although the dearth of high-quality supply will continue to fuel transactional activity and rental growth at the top end of the market.
A central conclusion from the latest Sentiment Index is that the negativity shaping the macro-economic outlook at the back end of last year has now started to influence expectations around corporate performance.
Although revenue growth expectations remain positive, the latest index points to negative sentiment around both headcount and capital expenditure growth – both essential preconditions to any expansionary demand in real estate markets. This is in keeping with the news flow from the tech and banking sectors where large scale job loss announcements have become a common occurrence over recent weeks.
It is important that those job losses – particularly in the tech sector – are put into some context. The tech titans have been on a huge growth spurt throughout the pandemic and what is now being announced should be viewed as a correction rather than a cataclysmic decline.
There may also be challenges at the smaller end of the tech sector, as the reduced availability of VC funding stalls growth. These factors will have implications for global real estate markets, mainly through the release of space for sub-letting or, as we have seen with Meta, financial provisions being made to exit leases.
The potential for space release, has parallels with the actions of the investment banks in the immediate post GFC period. At that point, the banks who had stockpiled office space to accommodate their extraordinary growth projections scaled back and released space, becoming accidental landlords in the process.
We do not anticipate this ‘grey space’ becoming a significant feature of global markets at this point, because most other sectors and occupiers have been operating right-sized portfolios and do not appear exposed to job losses in the same way as things stand.
One psychological consequence of the macro-economic environment, trailed in these pages previously, is growing job insecurity. Although global labour markets remain robust, the effects of global job loss announcements can be unsettling and impact on behaviours. Concerned employees might take a step back towards pre-covid working conditions and be more present in the office environment.
Occupancy strategy
Employers may be emboldened to deliver stronger mandates around the return to work. This is an emotive issue. Our Sentiment Index again points to two distinct dynamics.
First, few of the global occupiers that we surveyed in Q4 expect to return to pre-pandemic levels of occupancy in the next six months. This element of the survey has consistently delivered the weakest sentiment and it is observable in the market with glacial increases in office occupancy rates. What this points to is some acceptance that the world of work has changed, that some degree of flexibility will be at work and that as a result ‘normal’ occupancy levels will be recalibrated.
Linked to this, however, is our second dynamic. In the Q4 index we have seen an improving sentiment around increasing the density of office occupation. This points to the office becoming busier from existing, low levels. Those emboldened return to office mandates appear to be having an effect here. More occupiers are adopting an office first stance, whereby some flexibility is afforded to staff, but the dominant place of work (in terms of hours / days spent) is the office.
For example, Snap now require staff to be in the office 80% of their time; Getir now require their London staff to be in the office five days a week; Disney are moving to an in office four days a week footing; and, finally, Vanguard are more strongly enforcing an office presence Tuesday through Thursday after initially being met with resistance.
We recognise that all occupiers will respond differently, influenced by a different legacy, pandemic experience and end goal, but it is clear that the pendulum is swinging again on working styles and might well end up closer to the pre-pandemic pattern than envisaged at the outset of the pandemic.
Global office demand
This has consequences for global demand. The suggestion that occupiers will be reducing individual office or portfolio level footprints by forty or even fifty per cent look increasingly wide of the mark.
Again, the market reality is variety. We have seen some occupiers increasing footprint – particularly in life sciences, niche financials, education and elements of the legal sector – but equally we have seen some reducing the space they hold.
This suggests that global office demand, like office occupancy, will recalibrate to new levels but those levels will remain healthy, supporting operational and financial efficiency for the occupier and delivering performance for the real estate investor owning high-quality stock. For now, however, there is a clear need for the macro-economic environment and corporate growth projects to return to a more solid footing.
Read more or get in contact: Lee Elliott, global head of occupier research
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