Empty Spaces: US Office Vacancies Rise To Highest Levels in Four Decades

Vacant U.S. office space is rising at an alarming rate as decades of overzealous construction combined with changing work habits leaves commercial buildings at their emptiest since 1979, according to data published on Monday by Moody’s Analytics.

The data show that nearly 20% of office space in major U.S. cities stood unleased by the fourth quarter of 2023, up from 18.8% a year earlier.

While home and hybrid working habits, more common since millions were forced to work from home during the COVID-19 pandemic, have changed the market, Moody’s also suggests that years of overbuilding in the 1970s and 80s is also to blame.

Texas Office Space Massacre

The three cities with the highest vacancy rates are all in Texas — Houston, Dallas and Austin. This can be reflected in the share prices of some of the state’s commercial real estate investment trusts.

For example, Crown Castle Inc CCI, whose headquarters is in Houston, was down 15.5% in 2023.

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And, as in residential real estate, what matters is location. Boston Properties, Inc BXP, one of the cities with less empty office space, was up 5.3% during 2023.

Much of the empty space is in older buildings — particularly offices built in the generation before open-plan became the norm.

"You had a shift away from the ‘Mad Men,' Don Draper era of some of these large, large offices," said Thomas LaSalvia, head of commercial real-estate economics at Moody's Analytics.

China Context

But, what it’s taken the U.S. several decades to come to — China has managed in less than two. China’s property market is grave danger as Evergrande, once the most valuable property company in the world by market cap, nears collapse.

Compare these two real estate investment trust ETFs: Vanguard Real Estate Index Fund ETF VNQ, which tracks a portfolio of U.S.-based REITs, was up 6.2% in 2023, while the Vanguard Global ex-U.S. Real Estate Index Fund ETF VNQI, which is mainly made up of Asian property companies was up just 1.2% over last year.

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