Office vacancy rate nears 20% to set fresh record, Moody’s says

(Bloomberg) — US office vacancies hit a fresh peak in the first quarter as needs continue to evolve with hybrid work setups.

Vacancies rose to a record 19.8%, Moody’s Analytics said in a preliminary report Monday, from 19.6% in the fourth quarter of 2023. Despite the increase, the firm said that the early data points to a stable quarter for commercial real estate.

Tenants continue to downsize

Tenants continue to downsize with the hybrid work model showing more staying power, battering the office sector. The Federal Reserve’s interest rate hiking cycle has also wounded commercial real estate. The struggles in the sector have already sent vacancy rates past historic peaks in 1986 and 1991 with possibly room for more, according to Moody’s.

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“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.

Spots of light

The evolution of offices is similar to what’s happened with malls, where some thrive while others fail. Winners and losers will be determined by proximity to mixed-use neighborhoods and public parks instead of the typical office block, according to LaSalvia.

“There are spots of light and there are spots of extreme darkness,” he said. “This is part of a longer-term evolution where we are seeing obsolete buildings in obsolete neighborhoods.”

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Other sectors such as multifamily are seeing some positive signals as excess supply is finally being digested after six straight quarters of gains, with a peak at the end of 2023, according to Moody’s. In retail, smaller store openings by companies like Macy’s have helped keep vacancy rates stable.

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(Updates with detail about retail space in last paragraph. An earlier version of this story corrected the second paragraph to say Moody’s Analytics.)

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