The national office vacancy rate dipped 10 basis points during the third quarter to 20%. This slight decrease is a positive development amid a sector working through distress, according to an analysis by Moody’s CRE economist Nick Villa.
Moody’s CRE expects vacancy to peak late next year or early 2026 and said the path ahead will be non-linear for the office sector, with the slight compression in Q3 likely attributable to net absorption turning positive after seven quarters of declines.
Villa said the bottom of the market likely will not be apparent until after it has passed, especially with geopolitical uncertainty and changes in the government going into 2025.
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One dynamic to keep an eye on is a potential federal return-to-office mandate, which could increase office attendance and bolster downtown economic growth. The government is a major office tenant, with the Government Services Administration leasing more than 363 million square feet of office. The analysis noted, however, that increased office visits do not necessarily translate into higher office occupancy rates.
The U.S. central business district (CBD) vacancy rate for the quarter was slightly higher than the overall office vacancy rate at 20.3%. The difference between CBDs and non-CBDs is especially pronounced in the Western Region, where CBDs had an average office vacancy rate of 24%. Dayton, Ohio, had the highest CBD office vacancy rate at 37.5%, followed by Dallas at 34.4%, St.Louis at 33%, San Antonio at 31.4% and Las Vegas at 30.7%.
Looking back over the past five years, Villa found that the San Francisco CBD had the greatest change in its vacancy rate, increasing 2,090 basis points from 7.9% in Q4 2019 to 28.8% in Q3 2024. Meanwhile, Tucson’s vacancy rate declined 1,200 basis points from 22.2% to 10.2% over the same period.
Three of the five bottom markets in terms of CBD office vacancy also ranked among the bottom five in metro-level vacancy. Those markets were San Francisco, Austin and Raleigh-Durham. When comparing the CBD vacancy change to the metro-level vacancy change in each market, Villa found San Antonio ranked last with CBD vacancy rising at a faster rate than its metro-level vacancy by 1,180 bps over the past five years. Tucson remained the top performer, with CBD vacancy falling 920 basis points compared with its metro-level vacancy.
“Central Business Districts are often viewed as a barometer for the underlying metro and while the pandemic has certainly obfuscated this relationship, they nonetheless remain epicenters of economic activity and have a disproportionate impact on regional growth and employment,” said Villa.
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
