Offices Vacancies at the End of 2022 Were Worse Than Pandemic Height

The latest report on the office market from Moody’s Analytics, covering the fourth quarter of 2022, is on the grim side as it sees “further shadows on the future off the office.”

Even now, after the early heights of the pandemic, enforced closures, and work-from-home mandates, and after corporations began to reconsider how they would operate, the national vacancy rate reached a new high of 18.7%. The pandemic peak — hit in the second quarter of 2021 and third quarter of 2022 — was 18.5%.

Asking rents overall went up quarter over quarter by 0.3% ($35.05 to $35.14) and effective rates by 0.1% ($28.00 to $28.04). But that is at best a tarnished silver lining when vacancies are climbing at a rate faster than the effective fents. Additionally, those actual rates are barely 80% of what is sought, raising a question of the perception companies have of office space value.

One of the larger reasons for the vacancy rate increase was the high-tech sector. “Big technology companies that tended to bolster office demand for several years began reducing headcounts and office footage in 2022, with layoffs becoming increasingly common,” Moody’s wrote. “Across the sector, there were more than 97,000 announced job cuts in 2022, citing cost-cutting as the top reason. With the layoffs, companies are reducing their office space to manage operating margins. Meta (Facebook), Salesforce, Lyft, etc. all made the headlines by shedding millions of square feet of office space across the country. This trend contributed to the weak office sector performance in the fourth quarter of 2022.”

Over time, tech companies tend to operate in a boom-and-bust cycle mentality. When things are hot, the sector as a whole, driven by the largest firms, hire more people than they need, assuming that trends will continue, or some new development of idea will overtake the entire world. That rarely happens, with retreats coming about as regularly as the advances, even if frequently not as large.

A bigger danger facing office properties at the moment is the status of the overall economy, according to Moody’s, because “given the persistence of hybrid work, companies are more likely to target underutilized office space to manage operating costs if economic conditions worsen.” Many large companies have already been taking steps to reduce their real estate spend.

For example, Salesforce recently announced plans to cut 10% of its workforce, recording charges of between $1.0 billion to $1.4 billion for layoff costs, and another $450 million to $650 million for office space reductions.

“If a recession hits in 2023, more companies will likely make similar moves,” Moody’s wrote.