The softening in key U.S. office market fundamentals, seen in the prior two quarters, continued in the second quarter of 2023. As a result, net absorption remained negative, while vacancy and sublease space hit new record highs.

Here’s a summary of the key trends:

Tenant downsizing has become the norm, with space reductions of at least 20% to 30% being implemented by large occupiers on new leases and renewals. While existing lease obligations will temper the pace of such changes, the net result should be sustained upward pressure on vacancy.

As leases expire, the return of sublease space will create a challenge for landlords in terms of both a drop in revenue and how to position and price such space. Class A downtown sublease space is being offered at a 31% rental discount to direct space across the leading markets.

With repricing taking place on the sales side, it seems imminent in the rental market driven by the triple-hit of downsizing, sublease space and rising vacancy rates, as landlords become increasingly aggressive to secure tenants.

Performance and demand differentials are expected to widen. Bifurcation should be most evident between space class and age, but will also occur between and within markets, and different business sectors. High quality space will win out as firms seek the optimal work experience to retain and attract the best talent and bring employees back to the office.