U.S. Real Estate Market Outlook 2022
Office market inches closer to its “next normal”
U.S. office market activity strengthened in the second half of 2021, and the momentum likely will continue in 2022. Although the outlook depends on how new COVID variants impact society, effective medical advancements will make occupiers more comfortable with making long-term leasing decisions. At the same time, however, occupiers are still determining how best to support hybrid work and how it will impact their portfolio strategies. Although demand will be greater in 2022, the U.S. office market will contend with the highest vacancy in nearly three decades and lower rental rates until the second half of the year.
Occupier-favorable market conditions to persist
Throughout 2021, new lease transactions increased from pandemic lows, negative net absorption diminished and sublease space began to recede amid strong job growth nationally. These trends will accelerate in 2022—fueled by the expected creation of 1 million new office-using jobs—resulting in nationwide positive net absorption for the first time since Q1 2020.
The improvement in office demand will be greatest in markets hardest hit during the downturn, including Manhattan, Chicago, Seattle and Dallas. The relatively resilient Sun Belt markets of Austin, Miami, San Jose and Charlotte will also benefit in 2022 from company in-migration and the tech sector’s dynamic growth.
Despite the positive momentum, the national office vacancy rate will reach its highest level since 1993 in 2022 due to the delivery of more than 53 million sq. ft. of new office construction.
Average asking office rents will largely remain subdued for most of 2022, with downtown primary markets underperforming the suburbs in the near term but rebounding in the longer run. Several downtown office markets like Austin and Miami are already recovering robustly compared with their suburban counterparts. Over the next year, occupiers will have the opportunity to secure low rents in major markets like Manhattan, Los Angeles, San Francisco and Washington, D.C.
Figure 6: U.S. Office Rent and Vacancy Forecast
Source: CBRE Econometric Advisors, Q3 2021.
The rise of hybrid work
Workplace flexibility will become even more embedded in corporate business models next year. Our research suggests the average U.S. office employee will spend 24% less time working in the office, and our 2021 Occupier Sentiment Survey revealed that 87% of large companies plan to adopt a hybrid work approach.
As a result, employers increasingly view the office as a place for collaboration and meaningful employee connection. Activity-based workplaces will become the new planning standard for companies to enhance employee productivity and wellness. Amenities that meet the daily needs of employees, help them establish and maintain relationships and offer experiences that represent the company's brand and values will become more important.
The shifting role of the office will likely accelerate a flight to quality, with office buildings that offer the most desirable technology, amenities and flexible space capturing a growing share of demand.
Life sciences impacting more markets
The life sciences sector will continue growing in key U.S. office markets throughout 2022, fueled by advances in biotechnology and record levels of venture capital and other sources of funding. This is resulting in the largest pipeline of life sciences laboratory construction on record, with 23.6 million sq. ft. underway in the nation’s top 12 life sciences clusters as of Q3 2021. Average lab rents are at record highs in the premier life sciences clusters of Boston-Cambridge, the San Francisco Bay Area and San Diego. Life sciences’ growing labor pool and new development activity continues to spread to emerging hubs such as Pittsburgh, Houston and Salt Lake City, among many others.
Figure 7: U.S. Biotechnology R&D Employment
Source: U.S. Bureau of Labor Statistics, October 2021.
Trends to watch
- The growing role of ESG
Environmental and sustainability issues, such as carbon emissions, the use of sustainable materials, energy efficiency and wellness enhancements, are becoming ever more important to occupiers and owners of office buildings. These will increasingly require ongoing measurement, as opposed to one-time certifications, which is now possible thanks to advances in technology. In the near term, ESG initiatives will focus on health and wellness improvements for employees and tenants, but some office owners will make significant investments in improving energy efficiency and reducing carbon emissions of their properties to enhance long-term value.
- Hybrid work will stimulate demand for flex space
The shift to hybrid work will prompt occupiers to consider flexible office space for more agility. Flex providers were resilient and agile during the pandemic and will continue to shift their strategy to meet the demand for flexible space options. Flex office supply should grow in 2022 as providers resume acquiring new locations, landlords increase their own offerings and demand from small and large businesses grows.