The past year has brought new and ongoing changes to the ways that people live, work, and interact with their built environments. To understand how 2022 has affected occupier markets globally, World Research spoke to researchers and tenant professionals across the SPOC markets to understand the key trends for their locations over the last year.

Flight to quality

Across many SPOC cities, the key driver for the prime office markets has been the continued shift towards best-in-class office spaces. Prime office buildings that are easily accessible by multiple modes of transport, able to accommodate new ways of working, and are state-of-the-art and sustainable are in high demand. Other buildings are seeing a decrease in occupier activity and occupier demand, which has the potential to produce a bifurcated pricing structure in some markets, with less desirable spaces being offered at steeper discounts in order to secure tenants.

ESG top of mind

As part of the flight to quality, occupiers looking for top-quality space also want their offices to be as sustainable and ESG-compliant as possible. In many locations, particularly with older office stock, the inherent undersupply of sustainable prime buildings coupled with the increasing occupier demand for such stock is driving prime rental growth and is boosting development in some markets.

China as outlier

For three years, China has pursued a ‘zero-Covid’ policy that has prioritised containing the virus, often via the imposition of severe restrictions on mobility. This policy was abruptly ended in early December, with authorities no longer enforcing lockdowns, ending mass testing requirements, and removing the restrictions on domestic travel. Over the course of 2022, continuing zero-Covid policies disrupted business across China weighing on consumer sentiment and slowing economic growth. Ongoing uncertainties have also resulted in weaker demand for office spaces despite limited supply in some core areas which supported occupancy figures in the short term.

Inflation, inflation, inflation

Inflation remained at the forefront of landlords’ and occupiers’ minds through 2022, although with it hopefully now past its peak, the focus will likely shift to the inevitable economic slump to follow. This slowdown in growth is being driven by recession in North America and Europe, and continued weakness in China.

Outlook: The year ahead

• Rents continue to rise? As landlords and occupiers look to the year ahead, many are wondering how pricing will change given the economic outlook for the year. Across the globe, most brokers are predicting flat to slightly positive rental growth for 2023, though there is some regional variation.

• APAC predictions: Asia Pacific property markets face a number of challenges in 2023, from the war in Ukraine, post-Covid supply chain disruption, and inflation, which have caused central banks to raise rates and produce slowing growth.
  
  Asia is not alone in facing a challenging 2023, with lower predicted growth and some way from pre-Covid norms. While North America and Europe face recession in late 2022 and early 2023, Asia Pacific will see modest growth in many jurisdictions, and higher interest rates in some.
  
  Office markets should see stable to modest price growth, especially in core areas. Office attendance has improved throughout 2022, and remains at higher utilisation rates than EMEA and Americas markets, and there has been stability in the office market overall. And a look at 2023 wouldn’t be complete without mentioning ESG, as a greater push for ESG compliance means multinational companies will consider only green-rated buildings. However, limited supply and increasing competition will likely push up pricing for high-quality, certified assets.

• EMEA predictions: As firms continue to deal with an uncertain business situation and rising costs, there will continue to be a reluctance to commit to capex and longer-term leases, which will, in turn, impact demand for office space. Lower levels of business confidence could lead to the postponement of leasing deals until the economic outlook becomes clearer. However, vacancy rates continue to be at historically low levels across Europe so the impact on pricing will be gradual.
  
  With a focus on cost control, particularly in the technology sector, companies have begun reducing space requirements and adding sublease space to the market. However, the lack of high-quality, sustainable buildings means occupiers will still be competing to sign for the highest quality office space to fit ESG strategies, and it is likely that rents will diverge between the best and the rest and create a bifurcated pricing structure.

• North America predictions: Overall, the US office market will see headwinds in the first half of 2023 as uncertainty over a US economic slowdown causes most companies to control costs. Continued interest rate increases by the Federal Reserve have already caused a correction in office-using sectors such as tech and financial services, while employment growth in professional services and legal services remains steady.
  
  While the US labour market is historically tight, office availability levels continue to increase to historic highs as occupiers continue to re-evaluate their office space needs in the era of the hybrid workplace.
  
  For occupiers looking to take up space in key US markets, the continued tenant flight to quality will continue to dominate the narrative in 2023 as companies who can, remain focused on the highest quality office projects in the best locations with the most amenities.

_{Read the articles within Spotlight: Savills Prime Office Costs – Q4 2022 below.}