Talk of the pandemic’s demise of the office may have died down, but the industry’s woes have not subsided: four years into the pandemic, office vacancy rates are on the rise.
Moody’s said, “The office sector vacancy rate hit a record high of 20.1 percent in the second quarter of this year, breaking through the 20 percent barrier for the first time in history.” analysis “Vacancy rates have been rising steadily as the office sector has been slowly hemorrhaging and permanent changes in working behaviour have lasted longer than the first wave of the pandemic four years ago,” the report released today said.
In the last quarter, luck Moody’s previously reported that the office vacancy rate was already at 19.8 percent, 50 basis points higher than the recession peaks recorded in 1986 and 1991.
“The two historic peaks occurred as a result of underlying macroeconomic conditions,” said economist Nick Luettke, co-author of the previous analysis. luck “The rise in vacancy rates in 1986 was the result of a surge in supply due to high construction levels, while 1991 was the result of a confluence of construction over the previous decade and the greater economic uncertainty of the time.”
“Permanent changes” in work habits
As we all know, demand plummeted this time thanks to remote work, but interest rates were also an issue. The Federal Reserve has raised interest rates multiple times to curb soaring inflation, which hit a 40-year high in 2022. All commercial real estate is sensitive to interest rates, and after a decade of low interest rates, rising rates are especially painful. Still, while interest rates will eventually fall, the issues that dampen demand still seem to be prevalent.
“The current disruption in the office sector has different underlying causes than past peaks,” Moody’s said today. “Rather than macroeconomic uncertainty, the sector is undergoing lasting change as it approaches operating model equilibrium four years after the pandemic tipping point.”
Of course, as Perot Group and Hillwood Chairman Ross Perot Jr. once said: luck “It will take years to truly understand the damage the pandemic has done to the world,” he says. First, he says, “it has disrupted the habitual patterns of millions of people who commuted to real offices every day.”
Lack of demand leads to falling rents. Real rents fell 0.1% in the second quarter of this year and 0.5% last year. The analysis found that after positive rent growth in 2021 and 2022, the situation has reversed, with rents now negative or flat for four consecutive quarters. Meanwhile, net absorption (essentially the total amount of space leased minus the amount of space that has been vacant for a period of time) was negative 13.6 million square feet in the second quarter, the lowest in nearly three years.
“The rise in the office sector’s vacancy rate highlights the sector’s current predicament and raises legitimate concerns about how far vacancy rates will continue to rise in the future,” the analysis said. Right now, the economy is theoretically strong, which may be favorable for office space. Still, “the future direction and speed of vacancy rates will depend on how well the Federal Reserve navigates a soft landing.”
So far, it looks like the Fed is on track to cut rates once this year, following a stronger-than-expected inflation report. It’s not clear how much a single cut would help the office sector, which faces a much bigger problem of diminishing need, and by that measure, the industry isn’t doing so well. Meanwhile, Capital Economics predicts that office prices will fall more than 40% from peak to trough by the end of next year, not recovering until 2040 (an even more pessimistic revision than the firm’s previous forecast). Still, as Kevin Fagan, head of commercial real estate analysis at Moody’s, once said: FortuneHe predicted vacancies would start to decline after next year.