Office Vacancy Rate Hits Highest on Record

By at 22 February, 2024, 6:32 pm

by Raymond J. Keating – 

Investment in commercial real estate has been suffering for a long time. According to real GDP data, nonresidential structures investment, for example, basically was at the same amount in 2023 ($623.3 billion in 2017 dollars) as was the case in 2007 ($625.5 billion in 2017 dollars), and was down compared to 2019 ($644.8 billion).

The latest report on commercial real estate from Moody’s Analytics provides some insights on the state of commercial real estate. For example:

● In the fourth quarter 2023, the national office vacancy rate hit a record high of 19.6%. Moody’s noted that the previous record of 19.3% was set twice – “once in 1986 driven by a five-year period of significant inventory expansion and the other in 1991 during the Savings and Loans Crisis.” This latest surge “represented the largest quarterly increase since Q1 2021.”

● The shifting focus of work (such as more remote and hybrid work) is clear in much of this report, such as that “new Class A properties which offer flexible or smaller configurations are particularly attractive to tenants who decided to keep the physical office footprint for branding, purposeful gathering, training, and collaboration purposes. Suburban offices also fared better due to their proximity to local communities and, in some cases, shorter commute times.” Indeed, it was declared in the analysis that “the permanence of dynamic hybrid models has effectively muted office demand, making the year of 2023 the most downbeat since the Great Financial Crisis (GFC).” (See the following chart from the report.)

● However, the “retail sector remained largely steady throughout 2023 as the vacancy rate stayed flat at 10.3% in Q4.” That 10.3% was just a hair above the 10.2 percent rate pre-pandemic.

● The industrial (warehouse/distribution center) is seeing a cooling, according to the report. It was explained: “The industrial sector enjoyed exceptional growth over the past few years, driven in part by the continued strength of e-commerce as a share of total retail sales and the impact of manufacturing reshoring and nearshoring initiatives. Construction ramped up quickly since the beginning of the COVID-19 pandemic in response to intense demand… Demand for warehouse and distribution center space cooled as consumption shifted from goods to services and high interest rates challenged inventory management… Although vacancy increases reflected the market rebalancing, the level remained significantly lower than the sector’s pre-pandemic average.” (See the following chart.)



Technology has been changing how we work for some time now, with the pandemic pushing that process ahead at a more rapid pace. Looking ahead on the office space front, as Moody’s points out: “Office’s painful evolution depends on how the ‘Great Compromise’ will set the broader return-to-office (RTO) policy in the near term.”

It also must be kept in mind that the tightening of the U.S. labor market – due to a stagnating and aging population – will have a great impact on how this Great Compromise plays out, as highly skilled, talented and industrious employees will see an enhanced ability (other matters being equal, such as immigration and assorted public policies) to make greater demands in terms of how they work.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist, The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist and The Weekly Economist III: Another 52 Quick Reads to Help You Think Like an Economist.


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