Office vacancies could hit 20% next year

Currently, the US office vacancy rate is at 19 percent, according to real estate services company CBRE, which expects that number to top out at 19.9% next year.

The last time vacancy rates were this high was more than 30 years ago and the company doesn’t expect it to go below 18% till 2028.

But there are some key differences this time around.

In the ‘90s the situation was led by an oversupply of office space. Office employment slowed but then quickly recovered.

This time, office job growth is expected to be much softer. Demand for office space has shrunk and remote work has proven a lot stickier than some in real estate hoped. While many people still go into their offices, just 31% of companies require people to be in the office full time, down from nearly half last year. Another third of companies offer full flexibility in where people work, according to the Flex Index.

Both in the ‘90s and recently, real estate developers responded by building fewer offices. But since real estate timelines are very long, many of the office projects that were in the pipeline pre-pandemic have only recently finished. Currently, developers are building 64% less square footage of office space per year than they did before the pandemic.

Additionally, some of the existing office space is being converted into apartments and other types of real estate or being demolished, lessening overall supply.

“In the medium to long run, it's the supply side of office that's really going to bring this thing back into equilibrium,” CBRE Senior Managing Economist Stefan Weiss said.

However, he says the situation isn’t dire because a lot of the pain in office real estate is isolated to certain types of buildings in specific areas.

While vacancy rates are high across markets, cities with highest vacancy rates tend to be in recent high-growth areas (like tech hubs) with a lot of new supply over the last few years. San Francisco, Atlanta, and Chicago top the list.

But even in those cities there are bright spots, and the damage is fairly confined to downtown areas, to buildings from the ‘70s and ‘80s, and to locations that are far from walkable amenities like restaurants, CBRE’s Director of US office research Jessica Morin said.

“If you look at Chicago, Fulton Market, which is that vibrant mixed-use district, has a vacancy rate of 15%,” Morin said. “You compare that to the Central Loop, which is more your office-centric micro district and that has a vacancy rate of 28%.”

To take a broad overview: a small percentage of buildings are doing very poorly, while most of the office stock is doing okay. Two thirds of office buildings are more than 90% leased, CBRE data shows, while just 8% are at 50% occupancy or below.

Rather than doom and gloom, the high vacancy rates simply mean we’re in a tenants’ market, CBRE said, but that also varies by the type of building.

Office rents in prime buildings have held steady and in some cases are rising. In lower-quality buildings, landlords have had to offer concessions like periods of free rent and tenant improvement allowances. Only recently have asking rents in those buildings started to come down.