Moody's - Office Vacancies Data Story by Moody's Corporation

COVID-19 completely upended work dynamics, but none more so than for office workers. Both central business districts (CBDs) and suburban offices became ghost towns. Suddenly, all “non-essential workers” – the typical white-collar worker – began performing their job functions from anywhere.

Downtowns emptied. Now, office vacancies repeatedly break historic high records and office space totalling 902 million square feet stands vacant, equivalent to about 300 One World Trade Centers. The labor market, which rebounded strongly in late 2020 and grew through 2023, has empowered workers to demand flexible work arrangements as a job benefit, even as the market begins to soften.

What have all of these work pattern shifts meant for office space in the US? For a time, suburbs stabilized while their CBD counterparts bore the bulk of the downturn, resulting in an office sector with portfolio stress facing value declines and accelerating vacancy rates while rent growth is just treading water.

Yet as glimmers of a bottom in the office sector emerge, reports of the office’s death have been greatly exaggerated. For the office sector, much like for retail whose purported apocalypse was completely overblown, a nuanced understanding of the wider dynamics of urban economics is key. Recent exogenous macroeconomic shocks have jumpstarted a period of correction for the office sector, with rightsizing of the inventory pool at the forefront.

There is still a desire and place for the urban core as preferences shift to a more integrated live-work-play lifestyle that positions mixed-used neighborhoods for success. Consequently, all commercial real estate market participants will have a role in shaping what the future of cities, neighborhoods, and communities will be based on the best allocation of land and construction resources. Office space will certainly be part of the equation and location choice will become more important than ever.

Despite ongoing changes and the challenges that lie ahead, the sector will endure, as this asset class will always be in demand to varying degrees based on quality and location.