During a webinar predicting office performance in 2022, Julie Whelan, global head of occupier thought leadership at CBRE, was optimistic. This year, she expects people to continue to return to the office and tenant demand to steadily return. She was also realistic, noting the potential for Omicron to keep employees home and predicting rising vacancy rates through the first half of the year. Overall, office is slowly recovering, but 2022 will remain a tenant’s market.
“We do believe the office market is going to continue to improve in 2022. That outlook is really dependent on employees coming back into the office more than they are today,” said Whelan.
The biggest factor that could stop the return to the office is the emergence of new variants. In the fall, office-reopening plans we halted by the Delta variant, and now Omircon is having a similar effect. Still, Whelan doesn’t expect the variant to sour leasing activity long-term. “We know that Omicron is a factor to think about today, but even with the variant, our best educated guess is that physical office occupancy—meaning people frequenting offices—is going to slowly edge up in 2022,” she said. “We think that it will be muted in the first quarter as a result of Omicron.”
She is basing her prediction on Delta’s impact, which was ultimately nominal. “The reason we believe that is because of what we experience with Delta,” she said. “Office occupancy continued to pick up in 2021, so there is no reason to believe that Omicron is going to reverse course.” In fact, in the second half of the year, leasing activity has continue to grow, and is now only 16% below the pre-pandemic average. “That is significantly better than what that number was in the depths of the pandemic,” added Whelan. There has been an increase in new leasing activity specifically, and much of the demand is looking for high-quality space to help lure employees back into the office.
That’s the good news. The bad news: vacancy will continue to rise, putting downward pressure on rents and increasing concessions. The vacancy rate isn’t due to a lack of leasing demand, which is rebounding, but rather from new construction deliveries of projects the broke ground before the pandemic. With increased vacancy, occupiers will have the upper hand in negotiations, according to Whelan.
“Overall, we do expect that national rents and vacancies will continue to be challenged in 2022, and the market is going to continue to really search to regain that balance,” she said. “It will start to recover towards the end of 2022 or early 2023 in our most downside scenario.”