Here is a quick summary of JLL's Office Outlook report that came out a few weeks ago. We are experiencing much of what is discussed below. Still, we are experiencing positive movement in our submarkets as employers are solidifying their space requirements and human capital needs moving forward.
The Federal Reserve's aggressive monetary tightening in 2022 raised interest rates by 425 basis points and helped slow inflation, which declined from a peak of 9.1% in June to 6.5% in December. However, this tightening also had various impacts on the economy and companies. Many factors have contributed to the decline in inflation, such as supply chain improvements, lifting pandemic restrictions, and stabilized energy prices. Despite these improvements, the labor market remains tight, with low unemployment rates and high job openings.
Companies have not been immune to the effects of rate hikes. The S&P 500 has lost an average of 20% of its value since the beginning of 2022, and the NASDAQ index has lost nearly 30%. In light of the potential economic slowdown, some companies are considering cutting costs by reducing their office space. Some companies consider requiring employees to return to the office to improve productivity and collaboration, which could encourage voluntary attrition and avoid severance costs. However, the share of LinkedIn job postings described as remote has declined. Several large employers have announced that they will require employees to return to the office in 2023, including META, which has ceased offering remote work options in its current job postings.
Leasing activity in gateway markets increased in the fourth quarter, but gateway markets are still further from recovery than Sun-Belt markets, relative to 2019 levels. Tenants also continued to place space on the sublease market to reduce costs, driving sublease vacancy up an additional 6.4 million square feet to a record 136.6 million square feet at the end of the year. High-quality office space is in short supply, so landlords are able to keep asking rents high. Still, they are also offering more concessions, such as rent abatement and tenant improvement allowances, to attract tenants. This has offset the increase in asking rents. As new office building completions slow and sublease space shrinks, vacancy rates may soon peak and start to decline in many US markets. buildings
Conversion of obsolete office buildings to residential and other uses is rising, with 11.5 million square feet demolished or converted in 2022. While this is not a significant counterbalance to the 53.1 million square feet completed in 2022, conversion momentum and federal/municipal incentives will support continued activity in major urban submarkets and help stabilize office fundamentals.
In conclusion, the Federal Reserve's monetary tightening has significantly impacted inflation, the economy, and companies' strategies regarding office space and remote work policies. The trends in leasing activity, the sublease market, and landlord concessions suggest that office fundamentals are beginning to stabilize.
