My list of the top 23 office markets in the United States, by vacancy rate ranging from abysmal to just terrible
Commercial real estate hit by construction boom, oil crisis, pandemic, work from home, hiring freeze and layoffs. Old office towers cause huge losses.
By Wolf Richter for WOLF STREET.
The news for the commercial real estate office sector keeps getting worse. Some tech and social media companies have announced hiring freezes, including Facebook and Twitter. Others have made cutting costs a priority, promising very constrained hiring, such as Uber. Many startups are laying off people, including online used-car dealership Carvana, which laid off 2,500 workers last week. Wells Fargo mortgage lenders have begun laying off a significant portion of their employees as mortgage lending now lags.
Additionally, there is the work-from-home shift for office workers and hybrid models where employees only come to the office occasionally.
This all follows years of office building booms. New office towers are being completed and brought to market with the latest and greatest equipment, and these trophy towers compete with older office towers for dwindling office needs.
A general flight to quality has set in: when the leases of the old towers end, tenants move into the trophy towers and leave the old towers vacant. And landlords can’t lower rents enough because they couldn’t meet their mortgage payments. Thus, the commercial real estate office sector faces an ugly reality.
Availability rates, which look less bad than vacancy rates, have skyrocketed during the pandemic and in many cities have continued to rise through the first quarter of 2022 and are now in the astronomical zone.
According to data from Savills.
In San Francisco, for example, the availability rate of 26.8% was a new record, the worst in the data, and was up from an availability rate of 7.3% in the third quarter of 2019. In 2017 and 2018, San Francisco was the hottest tightest office market in the United States. It was called “office shortage,” where companies rented or bought office space they didn’t need, and monopolized that space, before someone else could get it, so that they eventually have space to develop.
There are now 23.1 million square feet (msf) of office space available on the market in San Francisco, according to Savills, up from 6.1 msf in 2019. And new construction is still coming on the market.
Meta, for example, in 2018, when it was still Facebook, leased an entire office tower in San Francisco, in addition to all the other office space it already owned in the City, in the Silicon Valley and elsewhere. “This new space will support our growing workforce as we continue to attract talent,” Facebook mentioned in a report. She has since signed other leases in Silicon Valley. Then came the pandemic and working from home, and now the hiring freeze. So who needs all that office space?
This is how the San Francisco market has gone from an endlessly publicized office shortage to an endless office glut that no one knows what to do with.
But San Francisco is not the worst office market. That honor goes to the Chicago suburban market, Houston and Dallas-Fort Worth – all with availability rates above 30%, according to Savills.
Houston has had the worst office market in the United States for years, beginning in 2015 when an office building boom hit the oil slump, where a slew of Texas-based oil and gas companies filed for bankruptcy and where the whole industry went through major episodes. cost reduction, layoffs and footprint reduction. Houston’s availability rates have skyrocketed. Then came the pandemic and working from home, and the situation got even worse.
It’s not the new office towers that have the problems; They attract tenants by offering them the latest and greatest, and a flight to quality developments that leave old office towers vacant, and they default on their debts and inflict huge losses on the holders of that debt, usually investors in commercial mortgage-backed securities. (CMBS) in which these mortgages have been integrated; or banks, insurance companies and other investors who hold outright mortgages.
For example, in Houston, two office towers, built in the 1980s on the same campus, were recently sold in a foreclosure sale, first Three Westlake Park and then Two Westlake Park. After fees and expenses, investors suffered mortgage losses of 81.9% and 88.3% respectively, as the value of these old office towers plummeted due to lack of demand.
And there’s a flood of sublease space on the market where tenants who don’t need the space are putting it on the market in hopes of finding a tenant who would help lower the cost of ownership. space until the lease expires. Companies that put their vacant spaces on the sublease market tend to undercut landlord prices because they don’t need to make a profit on the space; they just want to recoup some of their costs.
In the second half of last year, it was hoped that sublease space had peaked as businesses found tenants for sublease space or took it off the market. But in the first quarter, sublease space was still up 3.6% from the fourth quarter, to 159 million square feet, according to CBRE, quoted by the the wall street journal.
Despite astronomical availability rates, landlords have not significantly reduced their asking rents and, in many markets, have increased them. There are a few exceptions, including San Francisco, where asking rents have fallen.
But no matter what rents are asking, landlords negotiate and strike deals, and offer all sorts of incentives, from rent-free periods to hefty building allowances, to sign tenants for their empty space.
So here are 24 top office markets in the US (update: I just added Nashville to the original 23 after Savills released the data a few hours after it was released), and their availability rates in the first quarter of 2021 (green) and the first quarter of 2022 (purple), in order of worst to worst, with the least worst on this list, Boston, with an availability rate of 15.3%.
In six of the 24 markets, availability rates fell year over year, with the most in Boston (by 2.0 percentage points).
In 18 of 24 markets, availability rates deteriorated year over year, and they deteriorated fastest in San Francisco (by 3.2 percentage points), Nashville (by 2 .7 percentage points), Charlotte (by 2.5 percentage points), Chicago Downtown (by 2.4 percentage points) and Tampa Bay (by 2.3 percentage points):
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