Commercial Real Estate Outlook: Trends Influencing Office Space Mid-2023

Understanding trends as they develop is crucial for businesses and real estate professionals to navigate the ever-changing landscape of office space. Because, the dynamics of office space are constantly evolving, shaped by various trends and forces in the business world.

So let's take a mid-year look into the main disruptive forces shaping the office market forecast.?

Decarbonization

The latter half of 2023 is definitively marked by a growing emphasis on the decarbonization of office spaces. This is also part of the greater Environmental, Social, Governance (ESG) movement. And as companies become ESG compliant, real estate is taking a center stage. Because commercial real estate is one of the biggest energy consumers as well as the culprit behind 31% of greenhouse gas emissions, more than any other leg of the economy.

“The task (and price tag) of reducing the world’s building’s carbon footprints to the level we need to prevent a climate catastrophe is monumental.”

-Propmodo

Since transforming major CBDs to carbon-neutral entities is such a big task, governments are levying hard, fast, and expensive ramifications so businesses don’t drag their feet in the transition. Extreme fines are putting fire under the feet of corporations (where the boiler used to be) to adapt or die… and these fines are starting in 2024. So, you better believe that the latter half of 2023 will see a lot of scrambling for compliance.

New York, for example, is poised to enforce fines totaling $200 million on approximately 3,700 properties that do not meet code, according to a study conducted by Level Infrastructure on behalf of the Real Estate Board of New York. The New York Climate Mobilization Act, passed in 2019, has finally reached its reckoning hour. Properties that exceed the limits are set to face fines of $268 per metric ton over the limit starting in 2024 with stricter standards plotted to begin in 2030. Read more about New York's Local 97 Law and Whether it's Realistic.?

This will also drastically devalue space that operates on outdated energy systems. Because fines unleashed on landlords may trickle down to the tenants in non-compliant buildings if they don’t have safeguards in their lease.

Commercial Tenants: Learn how to Protect Your Finances From Green Restrictions.

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Regardless of how fast and furious these laws seem, they are coming regardless and will continue to shape the need for office space indefinitely.?

Rising Vacancy Rates

The office market is expected to be further influenced by rising vacancy rates as the gray market of under occupied spaces reaches its expiration.

According to the Office Apocalypse, 70% of leases signed pre-pandemic are approaching renewal. And if the 30% that already came due caused 17% of the total leasing revenue to drop, what do you think as the rest of those 70% approach their expiration?

Since so many companies can slash their CRE costs through integrating remote/ hybrid work, many offices are sitting severely underutilized.?

Right now, the true severity of the office market’s struggles is being concealed by vacancy rates that only tell half the story. Behind all the empty buildings are offices that are wildly unoccupied due to the prevalence of remote and hybrid schedules compounded with rising costs and inflation. Businesses simply do not need as large a footprint demanded in the past and are occupying their leases not at optimum capacity until their expiration ends and they can find a location that suits their new streamlined footprint.

The good news for tenants is that under-occupied buildings coming due will create opportunities for businesses seeking office spaces at favorable terms since landlords and property owners will need to adapt their strategies to attract tenants and maintain the value of their properties.

So, if you’re part of the other 70% of tenants approaching a pre-pandemic lease renewal, you have a lot of leverage to get the terms, price, or renovations you need to upgrade your tenancy.?

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Empty Office Conversions in the Pipeline

Rampant vacancies are not only hurting the commercial real estate industry. Zombie buildings create a strain on an area’s livelihood, sucking the value out of prime real estate.

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