A New Flurry of Office Vacancy Concerns
Nearly three years after the first cases of COVID-19, U.S. cities are still perplexed about the future of their business districts.
Nearly three years after the first cases of COVID-19 were reported in Wuhan the world is different. For cities, there is a persistent concern for most about the demise of commercial real estate. Over the past month there has been a flurry of these articles as the discussion seems to be intensifying at year’s end amid the broader macro economic environment.
Whether due to layoffs or cost-cutting measures, it seems that many tech companies are scaling back on their office space needs, leading to higher vacancy rates and putting the recovery of some downtown areas into question.
While there is no clear solution to this issue, these articles provide some insights and highlight the challenges that cities face as they seek to rebuild after the pandemic.
Below is a selection of articles highlighting the growing concern among business owners and city officials about office vacancies across the US. Many are questioning whether downtown areas can survive without a thriving commercial real estate sector.
Prior to Back of the Budget Commentaries on this Topic
“Mass Transit's Summer of Discontent” (July 2022)
“The Bay Area's Long Road to Post-COVID Recovery” (July 2022)
“The “Return to Office” Campaign Bust” (June 2022)
“Rethinking the Central Business District” (Nov 2021)
86 of 120 Markets have Seen an Increase in Vacancy Rates
With so many people now working remotely or hybrid schedules, some offices are becoming a thing of the past.
The pandemic has led to an increase in vacancy rates across the U.S., and this trend did not change in 2022. In the past year, 86 of the 120 markets monitored by CommercialEdge have seen an increase in vacancy rates—22 of those are top 25 markets.
The vacancy rate has increased significantly since November 2021 in Portland (by 400 bps) and San Francisco (by 390 bps).
The vacancy rate has decreased in the past 12 months only for these top markets: Boston (-170 bps), Charlotte (-120 bps) and Washington, D.C. (-80 bps).
Recent Articles on the Increase in Office Vacancies Among Major U.S. Cities
“Office Vacancies Climb Throughout the U.S.” Commercial Observer
The national vacancy rate at the end of October was 16.3 percent, which is 150 basis points higher than a year prior, according to a new report by CommercialEdge.
Owners of some of the most expensive office towers in the Twin Cities are choosing to walk away from their properties instead of continuing to make loan payments.
Worker foot traffic in downtown Seattle last month was less than 40% of that in October 2019, and the percentage has dropped since August, according to data from the Downtown Seattle Association.
The city’s largest private employer could continue to downsize its office footprint, executives said in a recent earnings call.
“S.F. and Silicon Valley’s office markets are slumping. Tech layoffs and cost-cutting could make it worse” San Francisco Chronicle
San Francisco’s office vacancy rate — based on the amount of office space listed for lease or sublease — was a record high 25.5% in the third quarter, according to real estate brokerage CBRE.
“Office vacancies in the Financial District are on the rise” Boston Business Journal
The third quarter saw vacancy rates in the Financial District [Boston] rise to 15.8%, the highest level since the pandemic began.
“The Office Is Half-Dead” Curbed New York
The tech industry is pulling back on office space in New York. Facebook, which was supposed to lease more space in Astor Place and Hudson Yards, put both plans on pause, as Bloomberg reported in July, and is now terminating its lease at 225 Park Avenue South. Amazon also cut back space it had planned to lease at Hudson Yards.
In the last three months, Dumbo Moving downsized about 200 offices into storage and about another 100 into smaller office space. That’s double what the New York City-based moving company did in the same period last year and multiples higher than what it would have done pre-pandemic.
Work From Home and the Office Real Estate Apocalypse (SSRN, June 2022)
We [the authors] revalue New York City office buildings taking into account both the cash flow and discount rate implications of these shocks, and find a 39% decline in long run value. For the U.S., we find a $413 billion value destruction. Higher quality buildings were buffered against these trends due to a flight to quality, while lower quality office is at risk of becoming a stranded asset. These valuation changes have repercussions for local public finances and financial stability.
Any opinions expressed herein are those of the author and the author alone.