Video transcript:

We felt it would be helpful to provide a 2023 summary of where the United States office market currently sits and where it’s going to be going.

The themes from the past 12 months have essentially been around the idea of a recession and layoffs will impact the need for office space as well as the movement to three and four-day workweeks in some of the major cities. Now what you’re finding is that the traditional growth markets in the Sunbow, which typically encompass the majority of the 10 fastest-growing major US cities, the office market has been on the ascendant and has been up in occupancy quite a bit.

First, look at the overall United States office market, we find a general vacancy rate of about 12 and a half percent which is much higher than it was three years ago. But then also the ability for the class B and Class C office products to take and absorb tenants from other types of office and other work environments to pull people out of their homes. People are not moving into class B and Class C office space and moving to Class A office space. Nationwide it’s the only class of office product that has had a positive absorption and it hasn’t been very much, it’s only been about a quarter of a million square feet of positive absorption as of q3, and q4. Now, class B, this is where it’s been a complete bloodbath. So far, as you look at toward the end of 2022, you’ve had around 5.8 million square feet of negative absorption of people moving out of the class B Office product. Class C has had a little bit of negative absorption just under a million square feet, but Class B has been a complete and utter bloodbath.

Now what’s interesting about this is that the vacancy rates in class A office products are still much higher than Class B and Class C products around a 6.4% vacancy rate. Class B has around 11.4% vacancy rate, but Class A is still up at the 17% vacancy rate level. Now with also a good deal of new product coming on the market in q1 of 2023. This almost entirely will be Class A office product, this will help impact the class a market and bring the vacancy rate even higher, as this flight to quality has been much more delayed, as the markets have originally anticipated.

Now, as investors, we find two different strategies to play here, first of all, is the ability to go in track Class C and Class B tenants out of class A and get them to upgrade their work environment. The other strategy was a little bit more hidden in the data, which has been a strategy that’s been true across all the major US markets for many years now that there has been a flight to the historical designation, mainly a flight to architectural distinction in the older Office product, especially in major growing US cities. And that’s provided a hedge for investors. And so as we go into 2023 and we effectuate our asset allocation, our asset acquisition strategies, were looking at two different things a short of the class B and Class C office market, especially the Class B and A look for a flight to quality Class A and a flight to the designation, a flight to optimization of flight to distinction in the historical high character sure market of historical building assets in the major US cities.

Hopefully, this is a great primer as you work on your 2023 investment strategy. Feel free to reach out if we can be of service to you!