US Office Vacancies Hit New 40-Year High

Plus: As apartment demand keeps going up, overbuilding and fierce competition mean it’s becoming a renter’s market in most cities.

US Office Vacancies Hit New 40-Year High

Plus: As apartment demand keeps going up, overbuilding and fierce competition mean it’s becoming a renter’s market in most cities.

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Good morning. U.S. offices are experiencing their highest vacancy rates in over 40 years. Simultaneously, 2023 saw apartment supply reaching a 36-year peak, a result of construction initiated during times of high occupancy rates and rent growth.

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Market Snapshot

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*Data as of 1/8/2024 market close.


America's Offices Are in 'Uncharted Territory' as Vacancies Hit an All-Time High

America's offices are emptier than at any point in at least 40 years, reflecting years of overbuilding and shifting work habits that were accelerated by the pandemic.

By the numbers: As per Moody's Analytics, an eye-opening 19.6% of office spaces in key U.S. cities remained unleased by the end of the fourth quarter in 2023. This figure marks an increase from the previous year's 18.8%. Notably, this is the highest vacancy rate observed since 1979, the earliest point from which Moody's has data available.

Overbuilding aftermath: The surge in office vacancies in the 1980s and 90s resulted from years of overbuilding fueled by generous lending practices and a construction boom, particularly in the South. Speculative office projects lacking tenants contributed to the glut of office buildings during the recession in 1990. Today, the overbuilt South is experiencing the highest office vacancy rates, with Houston, Dallas, and Austin, Texas leading the way.

Shift towards smaller: Another factor contributing to the vacancy record is the shift towards smaller offices. Companies have been ditching spacious private offices for open floors and cubicles, requiring less space per employee. This trend began in the early 1990s and has continued to this day. The Covid-19 pandemic further accelerated this trend as remote work decreased the need for physical office space. Most analysts expect offices to remain emptier for longer.

Changing winners and losers: There's been a remarkable reversal in the fortunes of U.S. cities when it comes to office space vacancy rates. Back in 1991, San Francisco boasted the third-lowest vacancy rate, but today, it's grappling with some of the most vacant offices nationwide. On the flip side, Palm Beach and Fort Lauderdale have turned their fortunes around. These cities, once topping the charts with the highest vacancy rates in 1991, now enjoy some of the lowest. Palm Beach's dramatic turnaround is particularly noteworthy – from a high of 28.8% in 1991 to a mere 14.2% in 2023.


A BIG reset: Capital Economics anticipates further challenges for the office segment of commercial real estate in the upcoming years. They predict a potential 20% further drop in office building prices, citing the enduring impact of work-from-home trends and looming concerns over commercial real estate debt. Analysts foresee a dramatic 43% decrease in US office property values, with a recovery to pre-pandemic valuations not expected for many years. Despite this bleak forecast, there's a silver lining: this market shift opens doors for tenants and investors to acquire premium spaces and high-value assets at heavily discounted prices not seen in decades.


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High Apartment Supply Leads to Rent Decline Despite Strong Q4 Absorption

RealPage's analysis highlights a historic rise in U.S. apartment availability in 2023, the most significant since 1987. The completion of 440,000 new units fueled this record-breaking supply, surpassing any seen in the past three decades.

Record absorption: The last quarter of 2023 saw a remarkable absorption of 58,000 apartments, setting a 25-year record for this period, aside from 2020 and 2021. Over the year, the market absorbed 234,000 units, harking back to the numbers before the pandemic. Yet, the total apartment occupancy slightly fell to 94.1%, a minor drop from the previous year, yet still aligning with historical norms. This rebound in demand can be linked to reduced inflation and heightened consumer confidence.

Modest rent increases amid future supply concerns: In 2023, the rental market experienced a modest rise in effective rents by just 0.3%, indicating a stabilization following previous declines. With a forecast of 671,000 new units completing in 2024, there's uncertainty regarding rent stability in the near future. Predictions post-2024 suggest a significant supply contraction, which could lead to higher occupancy and rental rates in the following years.

Regional variations: The impact of increased supply on rental rates varied significantly across U.S. regions in 2023. Approximately 40% of metropolitan areas, especially in the Sun Belt and Mountains regions, saw a decrease in rents due to oversupply. Conversely, the Midwest and Northeast, where construction was limited, observed rent increases. Regions with high supply, such as Florida and Phoenix, experienced notable rent reductions, in contrast to areas with lesser construction, which saw minimal rent decreases and more robust growth.


Renter’s market: The current excess in apartment supply has led to a decrease in rental prices, presenting a unique opportunity for renters. This renter-friendly market, particularly in high-growth areas, offers a chance for tenants to find more affordable housing options. Landlords and property owners face challenges, but renters are positioned to benefit from the current market conditions, leveraging the high supply to negotiate better rental terms.

✍️ Editor’s Picks

  • Rise of private credit: Private credit's rapid growth is fueling concerns about its impact on the economy and traditional lending.

  • Housing hits hard: Real estate distress persists in 2024, with high interest rates and market challenges impacting the sector.

  • Driving change: Austin eliminates off-street parking requirements, encouraging alternative transportation and improving housing affordability.

  • What’s the damage? On January 1st, property catastrophe reinsurance rates in the U.S. rose by up to 50%.

  • Trump's troubles: NY Attorney General asks for $370M fine and industry bans for Donald Trump and his real estate business, following the former president’s civil fraud trial.

  • Senior housing shortage: Inadequate investment and a slowdown in starts have led to a shortage of senior housing, with projections of 156K additional units needed by 2025 for those 80+.


  • Transit transformation: Integral Group is building a $1B mixed-use development near the Trinity Mills DART station in Carrollton, TX (where Shaq bought his recent mansion) featuring office, retail, etc.

  • Migration madness: The top 10 states for inbound migration in 2023 have been revealed, and the South leads with 87% population growth.

  • Sunny multifamily: Unsurprisingly, Eagle Property Capital and Promecap raised $325M for a fund targeting Sun Belt apartments.

  • Big buyer: The Connor Group, an American firm, ended 2023 with a $100M purchase of a Denver apartment complex.


  • Florida expansion: Infinity Properties has acquired a $43M portfolio in Altamonte Springs, expanding its presence in Orlando.

  • Building boom: Financing challenges and high demand for warehouses will sustain high property values and rents in Connecticut's industrial real estate market.

  • Deal of the day: Boston-based Longpoint acquired a 25-building industrial portfolio in South Florida for $262M, the largest industrial deal in Florida in over a year.

  • Of all places: Denholtz Properties acquired an 18-building, 723,734 SF portfolio in Lehigh Valley, PA, for multi-tenant industrial development.

  • Nearshoring boom: In 2023, more than 350 industrial projects totaling 5.6M square meters were built in Mexico, driven by nearshoring demand, with Monterrey being the most attractive.

  • Navigating transitions: 2023 saw a strong multifamily housing market in the US, but there were challenges due to tight inventory, higher rates, and rent control restrictions in Portland.


  • Windy City waves: A CA investor purchased the retail portions of Chicago's Marina City, including parking garages, for $30M.

  • Two, please: A Maryland-based firm bought two shopping centers in Chicago’s northwestern suburbs, including an Elgin shopping center for $19M. 

  • Facing headwinds: The Twin Cities retail real estate market sees few trades above $20M, with top sales including Blaine's Northtown Mall and Crossroads Center.

  • Biggest winner: Over the past year, Phoenix's retail market outperformed the rest of the U.S., exhibiting record vacancy rates and attracting robust interest from restaurants and retailers.


  • Breaking down walls: Harbor Associates and Taconic Capital Advisors sold a Class A office building in San Bernardino for $26.8M, part of a profitable portfolio sale in SoCal.

  • Distressed deals: An investor buys a distressed Chicago office building near Willis Tower at an 89% discount, generating $1.7M in NOI, 50% leased.

  • New record: Millennium Partners' Winthrop Center secures passive house certification, becoming the world's largest sustainable office building, attracting major leases.

  • Return to Cubicleville: UPS will require corporate employees to return to the office five days a week starting March 4th. Sorry, UPS workers.

  • Office onus: Austin's office market saw a slowdown in deal volume in 4Q23, but still maintains developer interest with 5MSF under construction.


Gross rental yields compared to 10-year Treasuries are expected to go up across all major CRE sectors by 2025, but will still underperform the 20-year average. Office is the notable exception, with 2025 projections looking like they’ll outperform the 20-year average by 2025.

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