There are more dormant office towers in the United States than at any point since 1979, according to a new report from Moody’s Analytics, which began tracking office leasing vacancies that year.
The rising supply of office space is due to a combination of surging remote and hybrid work that forces companies to reduce corporate footprints. Also, companies are exiting imploding progressive cities and high-taxed blue states for red ones while downsizing space.
In the report, office tower vacancies rose to a record 19.8%, up from 19.6% in the fourth quarter of 2023.
Even with the increase, there is an eerily calm across the commercial real estate sector. This comes as the Federal Reserve’s interest rate hiking cycle is higher for longer, indicating that the pain train is nearing (perhaps after the presidential election).
“The office stress isn’t quite done yet,” Thomas LaSalvia, Moody’s head of commercial real estate economics and one of the authors of the report, told Bloomberg in an interview. He noted recent positive economic indicators stave off a “perfect storm in the office sector.”
“There are spots of light and there are spots of extreme darkness,” LaSalvia said, adding, “This is part of a longer-term evolution where we are seeing obsolete buildings in obsolete neighborhoods.”
The high office vacancy rate continues to be terrible news for landlords and developers eager to fill their buildings, and the Fed’s hiking cycle has made refinancing very challenging.
Last month, Goldman’s Vinay Viswanathan penned a note explaining how “office mortgages are living on borrowed time.”
Viswanathan said there have been no major fireworks in CRE tower debt because the debt is being “extended and modified rather than refinanced,” which “mitigates a default wave and a sharp pick-up in losses on CRE loan portfolios.”