The number of office vacancies is approaching the highest level last seen during the savings and loan crisis of the 1980s.
Why is it important: It seems that a reckoning in the office market, much anticipated since the start of the pandemic, is upon us.
- “We’re not ready to say this is a cliffhanger for the office sector. But I think right now we’re finally entering the true turbulent times,” Thomas LaSalvia, director of economic research at Moody’s Analytics, told Axios.
- Context: Vacancy refers to the proportion of office space that is not let by a tenant – unlike rented office space that is mostly empty.
Zoom out: This would always be a slow moving trend. Remote work drove people home, but companies didn’t immediately give up their office space. Typical leases run for at least 10 years.
- And for property owners dealing with rising vacancies, there’s a new wrinkle: They’re being hit with rising costs thanks to higher interest rates on their variable-rate debt.
Status: At the end of last year, even Class A buildings saw a decline in occupancy, according to a new report from Moody’s.
- Some office landlords are showing signs of distress, the WSJ reported. Brookfield Asset Management last month defaulted on $750 million in debt on two 52-story office towers in Los Angeles. (It still holds hundreds of properties.)
- Those properties were Class A but faced competition from even more advanced Class A+ properties with better amenities, according to Moody’s report. Brookfield’s move may “incentivize other landlords,” it said.
- Meanwhile, Columbia Property Trust recently defaulted on a $1.7 billion loan backed by seven office properties, largely due to the rise in interest rates.
- The company took out a variable-rate loan in December 2021, according to Moody’s. It has gone from paying around 3% on the loan to 6%.
The bottom line: Office space is a good place to start cutting back if you’re a CEO looking to batten down the hatches in a turbulent time.
- Instead of laying off workers at a time of labor shortages, companies are looking to real estate as a way to cut costs, LaSalvia said.
- “The low-hanging fruit is definitely the office space,” he said.