The Office Buildings Struggling the Most Share Several Characteristics

Office buildings were hit hard during the pandemic, leading to higher vacancy rates and reduced occupancy demand– trends that continue today. The 10% hit the very hardest between the first quarter of 2020 when the pandemic began and the fourth quarter in 2022 when it had greatly waned have been labeled the “hardest-hit buildings” or HHBs, by CBRE in a new report.  On average these buildings had an average vacancy rate of 18% at the end of 2022. Key is that they shared several common denominators. 

Age

The largest number or 70% was built between 1980 and 2009, with differences in the age a factor in less versus more mature markets. For example, in less mature markets such as Austin and Phoenix the HHBs were built after 2009 while in more mature markets like Chicago, the buildings are older.

Downtown vs. Suburban

Downtown buildings were hit far greater, with 41% falling into the category of HHB–one in every seven office buildings qualified. In the suburbs, however, only one in every 12 did. The prime reason is that many workers pivoted to remote work at the start of the pandemic to flee congested downtown areas, which left many downtowns empty. And since that time, many of those areas have experienced only a slow—albeit steady–return to offices. In addition, some fast-growing downtowns in the Sun Belt like Austin and Miami have recovered faster than expensive, tech-focused centers like downtown San Francisco and Seattle.

Building Size

Size or square footage also reflected a trend. Buildings between 100,000 and 300,000 square feet, which represented the smallest group being analyzed, accounted for 84% of HHBs, with the average vacancy rate increasing to 57% in the fourth quarter of 2022 from 9% in the first quarter of 2020. Underrepresentation of larger buildings may be attributed to them having more tenants so those who vacated didn’t leave as much vacancy as those exiting smaller buildings did.

Region 

In which part of the country buildings were located also had an impact. The Northeast and Pacific regions had larger concentrations of HHBs and a slower return to offices than other areas, again as workers left crowded, expensive markets. The mid-Atlantic and Southeast had smaller concentrations of HHBs.

Crime Risks and Restaurants

Buildings of 100,000 square feet or more were considered in this comparison. A crime risk index developed revealed that HHBs nationwide had an average score that was 11% higher than for other buildings in their market, whether downtown or suburban. The crime score was the biggest external driver of what makes an HHB.

When it comes to amenities, measured by the number of nearby restaurants, suburban markets generally had lower amenity scores than downtown ones, since the latter usually had more restaurants close by.

Bottom Line 

Buildings that suffered the biggest occupancy loss fell into the 100,000-to-300,000-square-foot size, were located downtown, dated from between 1980 and 2009, were in a high crime area and had few nearby restaurants. These are the properties that owners and property managers must focus on to add tenants to reverse the trend.