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CBRE: Office Fundamentals To Keep Deteriorating Until Deliveries Slow Down Next Year

Park Avenue Plaza in Midtown Manhattan

Even as the bottom has dropped out of demand for office space, the sector is proving too big of a ship for adapting with a quick change of course.

National office vacancy hit a 30-year high of 17.8% in the first quarter and projects to keep rising until 2025, according to a CBRE report published Wednesday. The commercial real estate services giant doesn't envision office vacancy returning to the 12% level where it sat before the pandemic by the end of this decade, if at all.

New construction will join tenant downsizing to continue driving negative absorption through at least the latter part of next year, with Q1 deliveries next year expected to nearly match the record set in Q2 2021, CBRE reports. By the time net absorption turns positive again, nationwide vacancy could approach 20%.

Since the pandemic began, 147M SF of new office supply has come online as 110M SF of occupied space was vacated, the CBRE report found. Nationwide, new deliveries have averaged over 11.3M SF per quarter over that time frame, compared to the 10.7M SF the U.S. averaged in the 20 years before the pandemic.

Even though the flight to quality has left older Class-A buildings in dire financial straits, especially downtown, the trend has not been strong enough to fill entire new office buildings at anything like the rates seen before remote and hybrid work became such a large part of the economy. Buildings completed in the U.S. since Q1 2020 are more than 22% vacant, CBRE reports.

Larger tenants, especially coveted by owners of the newest, most expensive buildings, are the most likely to downsize their office footprints over the next couple of years, according to a CBRE occupier survey published May 18. Nearly 70% of respondents with over 10,000 employees plan to downsize, compared to 46% of smaller respondents.

The broader office market seems to be settling into the reality depicted in the CBRE report, with more owners facing debt maturities deciding to cut bait and sell at a loss rather than fight to refinance in a hostile market for office debt.

But even bad news can be helpful for owners if it provides some sense of predictability. With creditors having little hope of recouping value upon foreclosure and new deliveries expected to tail off dramatically in two years, multiyear extensions for troubled loans could become common, Moody's Analytics reports.