Economic Uncertainty Compounds Drop in Office Demand

With the broad acceptance of hybrid work arrangements, demand for office space as measured by tenants in the market (TIM) across 11 major U.S. markets has remained below pre-pandemic levels for the past three years. Although demand was further suppressed in the second half of 2022 by a weakening economy, TIM levels appear to have stabilized so far this year and are near 70% of pre-pandemic activity.

However, office leasing activity has not yet stabilized, suggesting that tenants are deferring lease decisions until there is greater economic clarity. The convergence of economic uncertainty and hybrid work makes it difficult to discern which is the primary cause of reduced demand. Leasing activity exceeded pre-pandemic levels for several months in 2021 before economic uncertainty set in late last year, so it is likely that cyclical events are the bigger factor. Once the economy stabilizes, a rebound in TIM and leasing activity is expected.

Figure 1: Indexed Average TIM & Leasing Activity Levels for Top 11 U.S. Markets

Source: CBRE Research, Q2 2023.

Of the top 11 U.S. office markets tracked by CBRE, April 2023 TIM levels increased in six and fell in five from six months earlier. Compared with pre-pandemic levels at the end of 2019, TIM levels are down in all markets except Manhattan, where office requirements are up by 2% on a square footage basis. Dallas and Boston have relatively healthy TIM levels, while Philadelphia and Seattle have the lowest.

Figure 2: Indexed Monthly Square Footage of Tenant Requirements by Market*

*Score of 100 represents pre-pandemic (2018/2019) average.
Source: CBRE Research, Q2 2023.

TIM levels differ by industry based on how widely hybrid work arrangements are adopted. The average space requirement of TIM between year-end 2019 and April 2023 fell in six of nine industry sectors tracked by CBRE. The technology industry’s average fell the most (-44%). CBRE’s Spring 2023 U.S. Office Occupier Sentiment Survey revealed that tech companies have one of the lowest average weekly office attendance requirements for employees (no more than 2.5 days) of any industry and are the most likely to reduce office space over the next three years.

Three industries have seen an increase in average space requirements since year-end 2019: manufacturing & transportation (+7%), retail trade (+6%) and finance & insurance (+4%).

Figure 3: Percentage Change in Average Office Requirement Size from TIM by Industry, 2019-2023

Source: CBRE Research, Q2 2023.

Finance & insurance had the largest share of total office requirements by square footage with 22% in Q2 2023 vs. 17% in Q4 2019, while tech had the lowest share with 12% vs. 25% over the same period.

Figure 4: Total Square Footage Share of TIM Requirements by Industry, 2023 vs. 2019

Source: CBRE Research, Q2 2023.

Since 2019, the number of small requirements (10,000 to 20,000 sq. ft.) has increased by 7% as of April, while the number of larger requirements 50,000 to 100,000 sq. ft. and 100,000+ sq. ft. fell by 38% and 36%, respectively.

Figure 5: Total Number of TIM Office Requirements by Size Range

Source: CBRE Research, Q2 2023.

The increase in smaller space requirements is a signal that building owners should consider dividing larger blocks of available space to meet the needs of today’s office users.