U.S. office vacancies hit an all-time high of 20%
A societal shift to remote work continues to ravage the commercial real estate market.
According to a new Moody's analysis, for the first time in history, office vacancies soared to an unprecedented 20.1% in the second quarter, up from 19.8% in the previous quarter.
"The slow bleed occurring in the office sector has led to a steady rise in the vacancy rate as permanent shifts in working behavior have outlasted the initial wave of the pandemic four years ago," the report states.
What makes this record particularly striking is that it's occurring against the backdrop of a relatively strong economy, with unemployment at 4.0% and GDP growth roughly at pre-pandemic levels.
Offices that feel like ghost towns are changing the entire commercial real estate landscape. Effective rents fell 0.1% in the second quarter and are down 0.5% over the past year.
Net absorption—which measures the total amount of leased space minus vacated space—hit -13.6 million square feet in Q2, its worst performance in nearly three years.
A ‘lasting shift’ in work habits
Historically, office vacancies spike during economic downturns, with notable peaks in 1986 and 1991 driven by overbuilding and fears of recession. Today's sky-high vacancy rates, however, stem from a more profound change.
“Rather than macroeconomic uncertainty, a lasting shift is occurring in the sector as we near equilibrium of working models four years after inflection point of the pandemic," wrote the author of the Moody’s report, Nick Luettke.
Just one year ago, Texas commercial real estate mogul Ross Perot Jr. saw trouble ahead. He told Fortune he expected a commercial real estate recession like history had never seen.
"It'll be years before we really understand the damage the pandemic did to the world. It broke the habit patterns of millions of people that used to go to work every day in a real office,” said Perot Jr.
A quarter of U.S. offices could be empty by 2026
The outlook for office real estate remains bleak.
A separate Moody's analysis released last week projected that nearly a quarter of U.S. office space could sit empty by 2026, which would wipe out $250 billion in property value.
Last year, Capital Economics issued its own haunting prediction - that office values would plummet more than 40% by the end of 2025, with no recovery in sight even by 2040.
There may be a glimmer of hope on the horizon, however.
The Federal Reserve's efforts to engineer a "soft landing" for the economy could help slow this downward spiral. If the Fed moves forward with an expected rate cut in 2024, lower interest rates could spur investment in office spaces.