During the years since the pandemic, commercial real estate sectors have followed differing, but mostly positive paths of recovery. Self-storage and industrial properties benefited from the pandemic, while retail suffered but rebounded. Hotels are in a continuing period of recovery, and apartments have remained resilient, said John Chang, chief intelligence and analytics officer at Marcus & Millichap.
Then there's office , which continues to face challenges. First, the asset class was hit hard by the pandemic and then by changing work behavior, with hybrid work arrangements ultimately reducing demand for space, said Chang.
“Office space demand strongly influences where people live, where they go shopping, which hotels they stay at when they're traveling on business, where they dine out, and where they play,” noted Chang. “So, office space demand can play a big role in the performance of surrounding commercial real estate.”
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Demand for office space fell for five consecutive quarters after the start of the pandemic, with 180 million square feet of space vacated. The vacancy rate rose from 12.3% during the first quarter of 2020 to 15.5% by Q2 2021, and negative absorption has persisted for nearly three years. Vacancy peaked at 17.2% in Q1 2024.
Positive indicators have been emerging in the office sector lately, including positive absorption in both urban and suburban markets during the past four quarters. But whether or not office has finally turned a corner is a question with many answers.
The suburban vacancy rate is sitting at 16% as of the first quarter of this year, while central business district vacancy is at 19.2%. Smaller and newer suburban offices have the lowest vacancy at 11.2%, while larger, older urban towers have reached a vacancy rate of 26%.
“On a metro by metro basis, it's a real patchwork,” said Chang. “Across the country, performance has largely depended on migration patterns and job creation, but state and local policies have also had a significant impact.”
Markets where absorption has been the strongest include Dallas, Charlotte, New York City, Chicago, Houston, Miami, Tampa, Orlando, Atlanta, Philadelphia, St. Louis, Sacramento and the Inland Empire. On the other side of the equation, several markets still face headwinds. Oakland has had negative absorption in 10 of the last 12 quarters, and San Francisco space demand has been negative in 10 of the last 13 quarters, resulting in a current vacancy rate of 27%, the highest in the country.
However, Chang noted momentum in the Bay Area may be turning a corner, with the vacancy rate dipping during the past three quarters. Meanwhile, Boston still faces headwinds, with negative office space demand running for the last nine consecutive quarters.
“Each metro has its own reality,” said Chang.
Looking forward, vacancy is expected to taper further as construction remains limited and employees return to the office. That said, recession risk has been rising, and historically, when unemployment rises, office demand slackens.
“This year, it's possible that rising unemployment could drive more employees back to the office, actually lifting space demand,” said Chang. “But there's a lot of uncertainty. Much will depend on trade policies and the unique characteristics of any impending economic downturn. Our baseline forecast suggests modest gains in space demand this year, but a lot of the variables are still up in the air.”
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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.
