It’s a case of bad news first, some consolation good news second, according to a Moody’s report
Office markets are heading to a worse place by the end of 2025 than in 2023 or 2024. Property and loan performance will remain at risk, projects Moody’s. Through next year office repayment rates will increase only “slightly” even while vacancies remain elevated, and rents will be weak.
Weak rents will owe to falling revenues as high vacancy rates and continuing hybrid work, causing existing tenants to reduce their office footprint. The combination of factors will give occupiers greater negotiation leverage. Leases will continue to reset lower, although steady long-term rates will help stabilize property valuations. Even so, Moody’s projects office delinquency rates to surpass 14% before 2026. That’s up from 11% in November 2024.
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Also, overbuilding in certain metro markets has undercut what otherwise might have been gains. In Austin, for example, even as office-using employment growth is well over 30%, the office asking-rent growth is about -10%. New development has increased vacancy levels, making supply still too high for the amount of demand. The firm says that San Francisco has seen potential revenue fall more than any other major market since the start of the pandemic.
Things are doing better in some markets for office so long as commute times are short, and amenities are attractive. As GlobeSt.com has reported over the last few years, one of the major factors in getting workers to come back to an office is the ease of traveling there. New York City is a good example. CRE revenue is better in Midtown than areas farther away. The reason: major train hubs. Not only is there the commute into the city from elsewhere, but then the additional bus or subway rides to reach a more remote office building.
In larger U.S. metro markets, there is a “have” and “have not” dichotomy. The right amenities can make an office building more attractive, but that means someone needs the capital to pay for them.
One interesting note is that office markets that already had “significant” vacancies in the mid-teens before 2020 saw less of an impact from hybrid work. Atlanta, Dallas, Houston, and Los Angeles, have had less revenue loss because “rents were already at very low levels back in 2019.”
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