Demand for U.S. office space declined for a ninth consecutive quarter between January and March as vacancies notched a new all-time high.

According to data from Cushman & Wakefield, the national office vacancy rate reached 20.2% in the first quarter, up from 19.5% at the end of 2023. Just before Covid, the office vacancy rate was below 13%.

The irony is that asking rents have increased alongside the sharp rise in vacancies—a trend that seems to contradict basic economics.

Part of the reason is that demand for premier office space remains relatively high. As Cushman & Wakefield showed, vacancies for desirable Class A buildings declined in 32 of the 93 markets captured in the study.

The problem is that these desirable buildings only account for 10% to 15% of existing inventory.

In perhaps another ironic twist, national vacancy rates are rising at a time when the U.S. jobs market is supposedly red hot. According to Cushman & Wakefield, office employment is growing at a slower pace than the rest of the jobs market.

“Softness is likely to persist as the economy slows under the weight of higher interest rates and as hybrid and remote work strategies continue to filter through,” Cushman & Wakefield analysts wrote.

Taken together, the negative vacancy trend isn’t expected to reverse anytime soon.

For builders, committing tens of millions of dollars to office development no longer makes sense, especially with financing rates at multi-decade highs.

Market downturn or "officepocalypse"?

The Cushman & Wakefield report showed that the construction pipeline of new office buildings is at an 11-year low. According to real estate firm JLL, however, the situation is actually much worse.

By JLL’s calculations, 2023 marked the first year that the amount of U.S. office space declined since record-keeping began in 2000.

In other words, new building projects are declining, and the total amount of office space is also on the downtrend. “The office stress isn’t quite done yet,” said Thomas LaSalvia, head of commercial real estate economics at Moody’s.

“There are spots of light, and there are spots of extreme darkness,” LaSalvia said. “This is part of a longer-term evolution where we are seeing obsolete buildings in obsolete neighborhoods.”

Many of those obsolete neighborhoods lie in city centers, where the value of commercial property has plummeted since the pandemic. According to Barry Sternlicht, CEO of Starwood Capital Group, office space has $1.2 trillion in losses “spread somewhere.”

Trepp is also warning of huge losses in office building valuations.

The market research firm estimates that office buildings constructed after 2000 have lost 52% of their value, while buildings constructed before 1950 face a 60% valuation loss.