Flight to quality continues as demand improves

Global Real Estate Perspective May 2022

Global office market demand held up well in the first quarter with quarterly leasing volumes up 36% on Q1 2021. All regions saw a significant resurgence in demand; leasing volumes were up 44% on Q1 2021 in the Americas, 31% in EMEA and 26% in Asia Pacific. However, global leasing levels are still below pre-pandemic norms. Quarterly net absorption was positive in EMEA and Asia Pacific but slightly negative in the U.S. 

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

Pricing for high-quality and premium office space has maintained its resilience, although concessions are elevated compared to historic averages. The global vacancy rate edged up again in Q1 to 14.7% as vacancy moved up in the U.S. while remaining stable in Europe and Asia Pacific. The subleasing market in the U.S., where it continues to be a major part of the market, exhibited continued stability in the first quarter.

Following pandemic-related delays, project completions picked up in 2021; however, the peak of the development cycle is anticipated to occur in 2022. There are a few issues which will influence the shape of the development pipeline going forward. In Europe, the Ukraine war is impacting construction activity, with many sites in Eastern Europe facing significant labor shortages. Across much of the world, construction costs are increasing at a fast pace and this is likely to continue throughout 2022. The future supply pipeline is consequently anticipated to tighten with a lower pipeline expected in 2023.

Future trends: Leasing momentum to continue improving

Outlook for 2022: Leasing momentum will continue to build throughout the year although not uniformly, while other metrics such as occupancy and sublease availability will show further signs of recovery. Office re-entry will also carry on rising through the year, but not reaching pre-pandemic levels in most markets. Increasing construction costs along with labor shortages will impact on development pipelines, especially in Europe.

Long-term: Tenants will begin to make meaningful assessments over new hybrid working arrangements, which will inform longer-term real estate decision-making and space planning, while landlords will respond with additional capital investment to meet evolving occupier needs. The flight to quality will continue, leaving lower-quality stock at risk of obsolescence.