U.S. Office Vacancy Breaks All-Time Record

Office buildings across the U.S. have more empty space than ever before, breaking records set during the real estate crashes of the 1980s and '90s.

Roughly 19.6% of office space in major American metropolitan areas was vacant at the end of the year, according to new data from Moody’s Analytics. That is up from 18.8% at the end of 2022 and higher than the previous record of 19.3% reached in 1986 and 1991.

Hybrid work isn’t the sole culprit of vacancies. Overbuilding of offices in the 1980s, fueled by cheap bank debt, still weighs on the market, The Wall Street Journal reported.

The regions of the country that were hit hardest four decades ago are once again facing the consequences of the longstanding glut. Many office parks built in the 1980s and ‘90s are in the Sun Belt, which has less red tape than population hubs like the Northeast and where land was also often cheaper.

In the 1990s, companies started taking less office space in favor of higher-density spaces, like open-plan or cubicle offices, Thomas LaSalvia, Moody’s Analytics’ head of commercial real estate economics, told the WSJ. That decade’s recession exacerbated the trend, and the shift toward smaller office space has continued since. The pandemic just accelerated the existing trend, he said.

Today, Houston, Dallas and Austin have the highest office vacancy rates in the country. The last time vacancy rates were almost as high as today, in 1991, those top spots were occupied by Palm Beach and Fort Lauderdale, Florida, and San Antonio, according to Moody’s.

While Texas is once again the vanguard of the office glut, Florida’s low taxes have made it a modern hot spot for finance companies. Palm Beach and Fort Lauderdale had some of the lowest office vacancy rates in the country, dropping from 1991 highs of 28.8% and 28.1%, respectively, to 14.2% and 18.9% in 2023.

A few factors differentiate the past trend from the present. With remote work, companies need even less space for employees than they did for cubicles, a factor that seems unlikely to shift even once the economic climate brightens.

The secular shifts in the market have weighed on the financials of office owners across the country. Nearly 6% of all office CMBS loans were delinquent at the end of 2023, up from 1.6% at the end of 2022, according to Trepp. That number could continue to rise, as interest rates remain elevated and $117B of office debt is expected to mature this year.