CBRE sees office vacancy peaking at 19.7% next year

Dive Brief:

With hybrid work damping demand for office space, the U.S. office vacancy rate hit a fresh 30-year high of 18.2% in the second quarter and it is expected to climb even higher — topping out at about 19.7% late next year — before stabilizing as recessionary pressures let up, Jessica Morin, head of U.S. Office Thought Leadership at CBRE, a real estate services firm, told CFO Dive.
“We are anticipating a recession to kick in later this year, so what’s happened in the office market is just that that economic uncertainty combined with hybrid work has really kind of kicked the can down the road,” Morin said in an interview.
Richard Barkham, CBRE’s global chief economist, is now forecasting a “very mild recession” in the fourth quarter of 2023 and the first quarter of 2024, after previously anticipating a recession in the second half of this year, according to an emailed statement from the company’s spokesperson.

Dive Insight:

The pain now felt by office landlords and commercial real estate investors is conversely a potential gain for tenants and their budget-conscious CFOs. At the same time, lease negotiations will likely vary from market to market, with CBRE’s second quarter office market report released last week showing a mixed picture depending on geography and submarket type.

Overall direct asking office rents in the top 10 largest office markets dropped 0.02% from the first quarter to $38.13, but were 1.2 percentage points higher than the year-earlier period. Downtown markets were weaker, with rents dipping 1% from the previous quarter and 0.5% year-over-year to $51.91 per square foot, while asking rents in suburban markets rose 1% year-over-year and 2.8% quarter-over-quarter to $29.12.

Morin said the spread between the asking and taking or actual rents that are negotiated has widened at $3.60 per square foot compared to under $3 prior to the COVID-19 pandemic. “We’re seeing that increase in vacancy and that’s giving the tenants the upper hand in negotiations,” she said, adding that effective rents are also dropping more for lower quality B or C properties.

Of the top 10 metros in the second quarter, San Francisco, Houston and Atlanta saw quarterly quarter-over-quarter declines in average metropolitan area asking rents of 2.5%, 0.3% and 0.4%, respectively, according to CBRE. Year-over-year declines were seen in Manhattan (-0.6%), Boston (-10.6%) and San Francisco (-4.0%), according to the report.