Dive Brief:

• Of 225 corporate real estate executives whose firms occupy office portfolios in the U.S., Canada and Latin America surveyed, 38% expect to expand their office space over the next three years, compared to 20% last year. Meanwhile, the share of the tenants that anticipate downsizing fell to 37% this year from 53% the previous year, the lowest level since 2021, according to a report from real estate services firm CBRE.
• For the first time since the pandemic, the annual survey shows tenant sentiment has shifted slightly in favor of expanding office footprints — potentially signaling that the worst of the space cutbacks could soon be in the rearview mirror, Julie Whelan, CBRE’s global head of occupier thought leadership, told CFO Dive. The battered U.S. office market also notched a separate green shoot as its net absorption rate turned positive in Q2, meaning more space was leased than vacated for the first time since Q3 2022, according to a separate CBRE report. 
• Whelan said last quarter’s positive net absorption and the uptick in expansion sentiment was notable and encouraging. “We’re approaching peak downsizing,” Whelan said. “We really do feel that we are getting to that kind of precipice where, if we continue to see quarters like this, we can safely say we’re past the peak.”

Dive Insight:

The slight shift in sentiment away from contraction comes as the office market is still battling through a deep slump: The trend toward remote work has eroded demand for office space, sent office vacancies to record highs and led U.S. regulators and banks to warn that losses on office loans pose a looming risk.   

Whelan was cautious about the timing of a recovery, noting that the U.S. office vacancy is still rising even as CBRE is anticipating it will peak at the middle of 2025 at about 19.8%. In addition, she noted that the study found a disparity in the office space strategy according to company size. 

The majority (58%) of large companies with 10,000 or more employees indicated that they still plan space reductions as compared to 26% of all other respondents surveyed. “Larger companies do still tend to be in contraction mode,” she said. That’s in part because they have larger portfolios and were already grappling with more vacant space than smaller companies coming into the pandemic, she said. 

“It’s the smaller users that are really clamping down and saying ‘we don’t need to contract as much as we did, because we did a lot of that, now we’re more certain about what we need and now we’re going into more of expansion mode,’” Whelan said. 

With so much variation in the current office market, it’s more important than ever for CFOs looking to get good deals on office leases to understand the dynamics of the submarket and the landlords, she said. That means knowing what the landlord’s tenant stack, lease roll periods and debt structure looks like. 

Location-specific data can help tenants understand how much negotiating power they have in a given building and avoid misperceptions. Indeed, Whelan says one mistake would-be occupiers are making is thinking that they’re automatically going to come to the table with more leverage simply because it’s a tenants’ market.

“I’ve seen a number of clients that are real estate decision makers come to us and say, ‘I need data because I need to prove to my CFO why we are or aren’t getting the deal they think we should be getting,’” Whelan said, noting that many are expecting a “generational deal” based on reading the headlines on the broader market. “The reality is that doesn’t exist in all buildings and all properties.”

The survey was conducted in April and May.