Recent research from NAIOP reveals that office sector absorption is likely to slow dramatically in 2023, with predictions for the entire year coming in just slightly higher than fourth-quarter 2022 estimates alone.
Net office space absorption in the fourth quarter is predicted to be 7.1 million square feet, and absorption for the entirety of 2023 is estimated to clock in at 8.1 million square feet, according to Hany Guirguis, Ph.D., of Manhattan College and Michael J. Seiler, DBA, of College of William & Mary. The pair forecast absorption in the first three quarters of 2024 to total 13.3 million square feet.
“The mere threat of a recession has caused tenants to take a defensive posture and become more cautious when renewing leases, with many instead choosing to move to a smaller, newer and more flexible footprint,” Guirguis and Seiler note. “Moreover, the large supply of space available for sublease weakens rental rates and contributes to lower net absorption.”
The NAIOP forecast draws from historical data on the economy and office real estate absorption to project future demand and assumes there is a 60% chance of a recession in 2023. If a recession does occur, actual net absorption is expected to turn negative in 2023, according to the researchers. If a recession does not occur, absorption will be higher than the current forecast.
The researchers also point to the ongoing flight to quality assets, noting that “a deeper look into the numbers reveals an appetite specifically for high-quality office buildings, which may support leasing activity in newly completed buildings despite continued weakness across the office sector.” The ongoing adoption of hybrid work models is also expected to further temper demand: earlier this fall, analysts from Newmark predicted that “high-quality assets in dynamic suburban markets may hold an advantage over traditionally stable Downtown assets,” with “relatively high availability, downward pressure on rents and greater demand for a vibrant worker experience” benefiting the upper tier of the office market.