The commercial real estate market is experiencing a shift, with the decline in office space demand stemming from remote and hybrid work models showing signs of stabilization. Experts indicate that the market is transitioning from a period of stabilization to recovery, driven by factors such as positive net absorption, reduced new construction, and a return to hybrid work models.
The trend of companies downsizing their office space in the wake of remote and hybrid work models appears to have reversed. Julie Whelan, global head of occupier thought leadership at CBRE, the world's largest commercial real estate services and investment firm, stated that the market has definitively turned. Whelan pointed to the recent leasing volume and positive net absorption as strong indicators of a market recovery.
Net absorption, a measure of the change in occupied versus vacant space, reached 10.3 million square feet last quarter, the highest in three years. This marked the first decline in vacancy since the fourth quarter of 2021, signaling a shift from a period of stabilization to one of recovery. While Whelan acknowledges that vacancy rates are unlikely to return to pre-pandemic levels, the positive trends suggest a promising outlook.The pandemic initially led to a surge in office space conversions, as buildings were repurposed into apartments, hotels, and other uses. Simultaneously, a significant amount of new office construction came online without matching demand. However, the pipeline of new office construction has since shrunk considerably, reaching 24 million square feet by the end of last year, less than half the amount from the previous year. This reduced supply of new office space should provide the market with time to absorb the existing stock. Whelan observed that while companies were initially forced into remote work arrangements and subsequently shed office space due to recession fears, the trend is now shifting towards a hybrid model. Many companies are settling on a three-plus day office presence, leading to increased demand for space. Across 32 out of the 57 markets tracked by CBRE, positive net absorption was observed last quarter, with improvements in 36 markets. Even San Francisco, a city heavily impacted by the shift to remote work, experienced positive net absorption year-over-year
Commercial Real Estate Office Market Remote Work Hybrid Work Net Absorption Vacancy Rates
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