America’s Offices Enter ‘Uncharted Territory’ As Vacancies Hit Record

America’s offices are trending in the wrong direction, even as the broader US economy looks to be on solid footing. 

According to a report from Moody’s Analytics, which described the US office market as being in “uncharted territory” in a report on Monday, the national office vacancy rate climbed 40 basis points last quarter to a record-breaking 19.6%. 

That beats the prior record of 19.3%, which has been hit twice before — once in 1986, then in 1991 amid the savings and loans crisis. Strategists said the latest surge marks the steepest quarterly increase since the first quarter of 2021, and the vacancy rate is 280 basis points above pre-pandemic levels. 

“Despite the increasingly optimistic consensus on the likelihood of a macroeconomic soft landing along with positive news from the labor market, the permanence of dynamic hybrid models has effectively muted office demand, making the year of 2023 the most downbeat since the Great Financial Crisis,” Moody’s strategists wrote in a note Monday.

Meanwhile, asking rents climbed by 0.1% in the fourth quarter of 2023, but effective rents dipped for the second consecutive quarter amid climbing vacancies, as depicted in the chart below.

Moody's Analytics Office Rent and vacancy trend

Office Rent and Vacancy Trend: Historic Vacancy Levels Lead to Declines in Effective Rent in Q4

Moody’s Analytics

In a separate note last month, Capital Economics forecasted trouble for the office segment of the commercial real estate market in the new year. Prices for office buildings, the research firm said, still have another 20% plunge ahead.

The work-from-home trends that started in the pandemic have proved stickier than anticipated, and there’s little sign of a reversal coming. At the same time, concerns over commercial real estate debt have ballooned in the last year, with some estimates hovering near $1.5 trillion for commercial real estate loans that are due to mature in the next several years, and which could have trouble refinancing in the current environment. 

“Though new supply is slowing, contracting demand continues to be the main driver of rising vacancy, which we think will continue for another couple of years,” Capital Economics said.

The firm’s analysts said the overall peak-to-trough decline for US office values could reach 43%, and that those properties won’t recover previous valuations for decades.

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