As demand for hybrid work continues to evolve, the US office vacancy rate reached a new peak in the first quarter.
Moody's Analytics said in a preliminary report Monday that the vacancy rate rose to a record 19.8% from 19.6% in the previous quarter. Despite rising vacancy rates, the agency said early data showed stable quarterly commercial real estate performance.
As the hybrid work model shows greater staying power, the continued downsizing of tenants has hit the office sector. The Federal Reserve's rate hike cycle is also hurting commercial real estate. According to Moody's data, the industry's plight has caused the vacancy rate to surpass historic highs in 1986 and 1991, and there may be room for further increase.
“The pressure on office buildings isn't completely over,” Thomas LaSalvia, head of commercial real estate economics at Moody's and co-author of the report, said in an interview on Tuesday. However, he said that recent positive economic indicators will help prevent a perfect storm in the office industry.
The development of office buildings is similar to the rise and fall of shopping malls. LaSalvia said winners and losers will depend on distance from multi-use communities and parks rather than typical office buildings.
“There are bright places, and there are places of extreme darkness,” LaSalvia said. “It's part of a long evolution, and we're seeing outdated buildings in outdated neighborhoods.”