Office Leasing: Trends and Predictions for Office Spaces in 2023
As office owners navigate a post-COVID world, they face changes in demand for office spaces and physical locations. This is due to office employees adapting to a work from home model from 2020 to early 2021 which caused the office leasing market to face one of the highest tenant losses in commercial real estate. Today, the office market has fully adapted and 2023 office models are no longer just about the four walls of a building but also about the amenities the building offers.
This article examines how the office real estate sector will evolve in 2023 and what these changes mean for investors and professionals in the commercial property market. It provides an overview of current trends in office markets and offers insight into future demand and design preferences related to office spaces.
Continue reading to learn the office market trends of 2023.
Covered in this article:
- Office Leasing Trends in 2023
- Demand for Office Space in 2023
- What Tenants Consider When Choosing Office Space
- Top Office Markets by Sector
- US Office Property Recommendations
- NAIOP Forecast for 2023
- The Bottom Line
Office Leasing Trends in 2023
The US office market slowly regained its ground after being greatly impacted by the pandemic. However, recovery rates occurred and continue to occur at different speeds in each market, resulting in a divide between primary and secondary office buildings that will likely persist throughout 2023.
Top-tier office spaces in desirable locations will support rising rents – while other properties will need to ramp up tenant marketing as occupiers continue to reassess their needs and adjust to new work habits. Here are the top office market trends to watch for in 2023, according to CBRE:
- Bifurcating market creates challenges for lower-quality assets
- Hybrid work and office utilization in focus
- Shorter commutes and quality location will become more critical
- Tenants want more amenities to attract workers
- Supply will moderate as developers hit a pause
- Occupiers focusing on quality and cost
- Portfolio optimization based on space utilization
Demand for Office Space in 2023
CBRE has seen a surge in demand for office space in Sun Belt markets, life sciences clusters, and best-in-class assets. These locations offer businesses many attractive amenities and a strong talent pool. Indeed, Crexi search data showed that Houston, Miami, and Dallas were three of the top five markets for office seekers in 2022.
Sun Belts cities have become increasingly popular due to their affordability. Life sciences clusters are home to important research hubs and universities, making them appealing to companies. Lastly, best-in-class assets provide access to unique products or services that attract tenants and investors.
What Tenants Consider When Choosing Office Space
Tenants consider a range of factors when choosing office space; according to research from J.P.Morgan these are the most influential factors:
- Attracting staff back to the office
- Increasing productivity
- Achieving ESG and wellness targets
- Competing for the best people
- Connecting with clients
Top Office Markets by Sector
The 2023 Commercial Real Estate Outlook Report by the National Association of Realtors (NAR) notes that COVID-19 has already had a considerable impact on the traditional work environment. Hybrid work is now commonplace for many people. However, some companies are demanding employees return to in-person work, citing improved collaboration and culture, among other reasons.
This year may prove challenging for office space as the sector continues to adapt to improve occupant experience and lure back tenants. Vacancies may stagnate due to older offices lacking modern amenities. However, real estate is local, and some office markets in the US are likely to perform much better than others.
These are the top-performing office markets over the past 12 months, according to the NAR:
Vacancy rate (December 2022)
- Myrtle Beach, SC
- Salisbury, MD
- York, PA
- Pensacola, FL
- Youngstown, OH
- Boston, MA
- San Jose, CA
- Dallas-Fort Worth, TX
- Austin, TX
- Atlanta, GA
- Miami, FL
- Palm Beach, FL
- Sarasota, FL
- Las Vegas, NV
- Ogden, UT
US Office Property Recommendations
In 2022, office demand wasn’t necessarily an all-or-nothing situation. Core gateway office markets attracted promising talent, with access to large skilled labor pools and plentiful options for the next job. Now in 2023, PwC and the Urban Land Institute stated in the Emerging Trends in Real Estate 2023 report, there is little consensus about the demand for office space beyond hybrid:
“The future of work is hybrid. Surveys indicate that the average office employee will work in person three to 3.5 days a week, reflecting the tug-of-war between employers and employees. Many employers want personnel in the office, even more to instill culture, ease onboarding, and increase collaboration and productivity. Pro-office voices are growing, and companies – particularly in the financial sector – are increasingly demanding a full-time return to the office.”
The report also noted the reduction in demand for office space caused by work-from-home (WFH) is expected to be offset by the growth in office-using employees and design changes; companies will likely retain their desks to accommodate days when the entire workforce is in the office. Pro-office proponents argue that WFH’s impact on office demand has been exaggerated.
Suburban office vacancy rates have remained relatively stable in comparison to downtown offices, which have seen a significant increase since the start of 2020. This is due to adjustments made by companies in urban areas and more co-working spaces providing small teams with alternative work locations.
Here are the top office markets for buying and holding, and the top office subclasses, according to ULI’s survey. The percentages listed below refer to the number of reported respondents that recommended each city.
Top markets to buy and hold
- Nashville 87%
- Salt Lake City 86%
- San Diego 84%
- Tampa/St. Petersburg 81%
- Raleigh/Durham 78%
- Austin 76%
- Fort Lauderdale 75%
- San Antonio 73%
- Miami 72%
- West Palm Beach 65%
Best office subtypes
- Medical office 89.9%
- Suburban office 74.0%
- Central-city office 80.7%
NAIOP Forecast for 2023
NAIOP predicts that office absorption will slow this year due to economic uncertainty. The national office market saw 6.6 million square feet of absorption in the second and third quarters of 2022, pushing vacancy rates to 17.1%, the highest level since 1993. However, new construction continued to outpace absorption as tenants favored high-quality office buildings for their flexibility and ability to attract and retain talent.
The threat of recession has made tenants more cautious when renewing leases or signing a new lease transaction, and many are opting for smaller office spaces with more flexible footprints. With a high supply of sublease space driving down net absorption rates, the Bureau of Labor Statistics reported an increase in new office-using jobs – but will these be working on-site or remotely? Employers prefer in-office workforces, but hybrid schedules may be necessary if unemployment rises. All this could change if the rate grows too high and employers regain control.
Given these trends, NAIOP expects absorption to shift to 8.1 million square feet for 2023, while 13.3 million square feet is forecasted for the first three quarters of 2024.
The Bottom Line
2023 could provide an opportunity for the savvy office space investor. Experienced office investors who focus on properties with credit tenants, long-term-remaining leases, and higher occupancies or smaller tenants looking to lease office space can hold their anticipation for more promising returns and opportunities. Investors who often favor a buy-and-hold approach, looking for long-term leases and higher occupancies, may experience more robust returns than ever previously seen.
*Page last updated on February 2023