Maybe 20% Vacancies Will Bring a New Normal to Office

Many in CRE have wondered when the office market would finally stabilize and calm. Probably not today, as vacancies have risen to 19.8%, up from 2023 Q4’s 19.6%, according to Bloomberg.

Though that isn’t as bad as it sounds.

“‘The office stress isn’t quite done yet,’ Thomas LaSalvia, Moody’s head of commercial real estate economics and an author of the report, said in an interview Tuesday. ‘But, recent positive economic indicators are helping to prevent a perfect storm in the office sector,’ he said.”

Trends, even economic or financial, only run for so long. Inflation is an example. Essentially, the economy in a country runs hotter and faster than the underlying conditions can justify. It’s like a competitive footrace. The runners give their all, cross the finish line, and often collapse. They’ve burned through all their energy. Lactic acid has built up, creating pain in the muscles.

“Despite the well-publicized challenges facing the office sector, signs of supply/demand equilibrium are emerging,” wrote CBRE. “Office rightsizing appears to be nearing an end as most companies have adjusted their lease commitments and are becoming more insistent about employees returning to the office. Sublease vacancy has begun to decline and occupied space per employee appears to have stabilized at 148 sq. ft. or 9% below the pre-pandemic level. However, reductions in space per employee pre-dated the pandemic as companies have long sought greater efficiencies and many allowed remote work arrangements.”

In other words, the office market is beginning to recover, or at least getting near bottom but there’s still a way to go. CBRE is estimating that the overall office vacancy rate will eventually peak at about 20% sometime in 2025. Part of the dynamic has been hybrid work, and another part, more efficient use of space by companies.

According to LaSalvia, what will happen is similar to malls. Some thrived and moved ahead. Others didn’t. He thinks that the office winners will be those near mixed-use neighborhoods and public parks. An additional factor to add is the quality of office. Class-A ones are more likely to see demand. B and C class offices will see greater difficulties.