U.S. office vacancies to wipe $250Bn off property values by 2026 – Moody’s
NEW YORK, UNITED STATES — The U.S. office market is facing a grim outlook as the persistent trend of remote work continues to drive vacancy rates to unprecedented levels.
According to a recent report by Moody’s, office vacancy rates are projected to reach 24% by 2026, from 19.8% for the first quarter of this year. As a result, commercial property values could plummet by as much as $250 billion.
Implications for landlords and RTO
Moody’s report estimates a revenue loss between $8 billion and $10 billion, compounded by lower rents and increased lease turnovers.
Todd Metcalfe, Moody’s associate director of commercial real estate forecasting, and Tom LaSalvia, head of CRE economics, emphasize that this situation could translate into significant “property value destruction.”
Employers across the U.S. are increasingly opting to reduce their office space or transition from long-term leases to more flexible, short-term co-working arrangements.
This shift is partly driven by the widespread adoption of hybrid work models, with 85% of North American organizations having implemented such practices according to brokerage Jones Lang LaSalle Inc.
“The argument for maintaining or even increasing remote work practices remains compelling for many businesses,” the Moody’s authors noted.
“If productivity remains stable and costs can be reduced by forgoing physical office spaces, the rationale for mandating in-office attendance diminishes.”
Long-term outlook for commercial real estate
The Moody’s analysis specifically examined sectors with high work-from-home rates, such as finance, information, real estate, and administrative sectors.
Using various data sources, including the Survey of Working Arrangements and Attitudes, Moody’s found that current office workers require about 14% less office space than before the pandemic.
This finding aligns with research from the McKinsey Global Institute, which predicts a 13% reduction in office space demand in typical cities globally by 2030.
While the outlook appears bleak, the report suggests that vacancy rates will eventually plateau as obsolete office buildings are repurposed or demolished.
“Right-sizing will continue over the next decade as the market shakes out less efficient space for flexible floorplans that support our relatively new working habits,” the report concluded.
As the commercial real estate market grapples with these challenges, property owners and investors will need to adapt to the changing landscape of work to mitigate potential losses and find new opportunities in the evolving office market.
