The commercial real estate sector in the United States continues to face challenges as office vacancies reached an all-time high of 19.8% in the first quarter of 2023, according to a preliminary report released by Moody’s Analytics on Monday.
This slight increase from the previous quarter’s 19.6% vacancy rate underscores the ongoing impact of the hybrid work model on the office sector.
Thomas LaSalvia, head of commercial real estate economics at Moody’s and co-author of the report, acknowledged that “the office stress isn’t quite done yet” in an interview on Tuesday.
However, he also noted that recent positive economic indicators are helping to prevent a worst-case scenario for the sector.
Office vacancies in the US hit a fresh record high in the first quarter as needs continue to evolve with hybrid work setups, according to Moody's https://t.co/y2Xwb3wvAu
— Bloomberg (@business) April 2, 2024
The shift towards hybrid work arrangements has led many tenants to downsize their office spaces, contributing to the record-high vacancy rates.
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Additionally, the Federal Reserve’s interest rate hikes have further compounded the challenges faced by the commercial real estate industry. Moody’s suggests that vacancy rates may continue to rise, surpassing the historic peaks seen in 1986 and 1991.
LaSalvia drew parallels between the evolution of offices and the transformation of shopping malls, stating that “there are spots of light and there are spots of extreme darkness.”
He explained that the success of office buildings will be determined by their proximity to mixed-use neighborhoods and public parks, rather than the traditional office block setting. “This is part of a longer-term evolution where we are seeing obsolete buildings in obsolete neighborhoods,” LaSalvia added.
Office vacancies in the US hit a fresh record high in the first quarter as needs continue to evolve with hybrid work setups, according to Moody's https://t.co/y2Xwb3wvAu
— Bloomberg (@business) April 2, 2024
Despite the challenges in the office sector, other sectors within commercial real estate are showing signs of improvement.
The multifamily sector, for instance, is witnessing positive signals as excess supply is being absorbed after six consecutive quarters of gains, with a peak at the end of 2023.
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Similarly, the retail sector has benefited from smaller store openings by companies such as Macy’s, helping to maintain stable vacancy rates.