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Momentum dips as rising headwinds inspire caution

Global Real Estate Perspective August 2022

Global office leasing volumes were up 20% on the previous year during Q2 2022. Nevertheless, there are warning signs that momentum is starting to slow as decision-making processes elongate, and a more difficult funding environment in growth industries is filtering through to leasing activity. Leasing volumes held stable over Q2, but this bucks the pre-pandemic trend where the second quarter would usually show an increase on the first. Additionally, while global net absorption remained positive in Q2, it was down 89% over the quarter.

This article is part of JLL’s Global Real Estate Perspective

In most markets, rental levels for high-quality and premium office space remain resilient, even if concessions are elevated compared to historic averages. The global vacancy rate edged up again in Q2 to 14.4%, with vacancy moving up in the U.S. and Europe while holding stable in Asia Pacific.

The peak of the development cycle is expected to occur this year with still elevated but lower deliveries in 2023. Nonetheless, the current economic headwinds are impacting the construction sector and will flow through to the development pipeline over the coming 12 to 24 months. Rising construction costs, a shortage of labor (especially in Eastern Europe due to the war in Ukraine) and supply chain disruption are creating uncertainty and will help to shape the development pipeline. The future supply pipeline is consequently anticipated to tighten and there is potential for deliveries to be delayed.

Future trends: Increased demand for flexibility and quality

Short-term: Economic uncertainty will weigh on corporate planning, leading to elongated decision-making and a potential slowing of momentum in the market. Vacancy is likely to rise by the end of the year but to remain low by historic standards in many markets. Prime-quality assets are likely to outperform.

Long-term: As workers continue to head back to the office, corporate occupiers will make meaningful assessments over new hybrid working arrangements which will influence longer-term real estate decision-making. The now established trend of tenants needing higher-quality buildings and higher levels of flexibility will put pressure on landlords to respond with additional capex to upgrade and provide the amenities that tenants demand.