Life for corporate office tenants is unlikely to get any easier in 2023. Double-digit inflation and high interest rates have ushered in the prospect of contracting economies, while the pandemic has accelerated the growth of flexible and hybrid working practices.
Workers are now demanding more from their professional environment. They want offices that make collaboration easy, boost productivity and enhance wellbeing.
In some markets, demographics accentuate this. Populations are ageing, so workforces are shrinking – and this means employers need to compete all the harder to recruit and retain staff. Seeking out the very best office space looks set to be a key imperative for office occupiers in 2023.
But it’s not as simple as building lots more high-quality offices to satisfy demand. Inflation sent the cost of construction and refurbishment through the roof in 2022, giving developers pause for thought.
Landlords were faced with a stark choice too: offer high-quality space at a higher price, or offer reduced tenant incentives for a similar price.
Many landlords – particularly in Europe, the Middle East & Africa (EMEA) – opted for the latter option. And so net effective costs to occupiers – inclusive of rent, fit-out, and any incentives – rose only 4% in 2022, despite double-digit inflation in a number of markets. The office leasing market held steady in the final quarter of 2022 as a result.
Going into 2023, we expect rents to edge upwards in several of our 30 featured office markets, due to a combination of inflationary pressures and the limited availability of Grade A stock.
That said, any market optimism will be cautious at best in 2023. Signs of economic resilience in EMEA and North America are welcome, but faint. We expect occupiers to put changes on hold – or even reduce the amount of space they occupy – in the coming year as they wait for conditions to improve. Technology occupiers in several markets have already begun increasing the proportion of space they sublet.
Top 10 highest-cost prime office markets
Source: Savills Research
Adapting to hybrid working and embracing green offices
The overall picture of marginal rent rises conceals the potential for more dramatic increases, driven by the new importance attached to environmental, social and governance (ESG) issues.
It’s not just that the post-pandemic workforce expect more fluidity and quality from their working environments. Increasing regulatory requirements, alongside rocketing energy costs, have forced corporations to focus on energy efficiency and the effects of climate change.
And yet high-quality, ESG-certified properties are in short supply in the major office markets. This scarcity will only stretch the gulf between the best and the rest. The outlook for well-located, sustainable, collaborative and healthy office space remains rosy.
Read the full Savills Prime Office Costs report for Q4 2022 here.
