American cities are hollowing out
don't buy commercial real estate until 2026--or later; and they want to pack us into 15-minute cities? I don't think so.
Did NAIOP Get The Memo? Moody’s Predicts 24% Of Office Towers Will Be Vacant By 2026 (Attendance In 10 Largest Business Districts Still Below 50% Of Pre-COVID Level)
By confoundedinterest17 on June 29, 2024
Did NAIOP get the memo? NAIOP (National Association of Industrial and Office Properties) is a trade group comprised of commericial real estate developers and academics. Lobbying for more office space to be built despite overbuilding,
Another chink in the armor of the US economy (not the roaring economy Biden and Yellen keep screaming about). Overbuilding of office space, COVID shutdowns, remote working and urban crime. A recipe for office vacancy. Moody's predicts 24% of office towers will be vacant by 2026!
During the first three months of 2023, U.S. office vacancy topped 20 percent for the first time in decades. In San Francisco, Dallas, and Houston, vacancy rates are as high as 25 percent. These figures understate the severity of the crisis because they only cover spaces that are no longer leased. Most office leases were signed before the pandemic and have yet to come up for renewal. Actual office use points to a further decrease in demand. Attendance in the 10 largest business districts is still below 50 percent of its pre-COVID level, as white-collar employees spend an estimated 28 percent of their workdays at home.
A new report from Moody's offers yet another grim outlook that the commercial real estate downturn is nowhere near the bottom. Elevated interest rates and persistent remote and hybrid working trends could result in around 24% of all office towers standing vacant within the next two years. The office tower apocalypse will result in more depressed values that will only pressure landlords.
"Combining these insights, with our more than 40 years of historic office performance data, as well as future employment projections, our model indicates that the impact on office demand from work from home will be around 14% on average across a 63- month period, resulting in vacancy rates that peak in early 2026 at approximately 24% nationally," Moody's analysts Todd Metcalfe, Anthony Spinelli, and Thomas LaSalvia wrote in the report.
In a separate report, Tom LaSalvia, Moody's head of CRE economics, wrote that the office vacancy rate's move from 19.8% in the first quarter of this year to the expected 24% by 2026 could reduce revenue for office landlords by between $8 billion and $10 billion. Factor in lower rents and higher costs, this may translate into "property value destruction" in the range of a quarter-trillion dollars.
In addition to remote working trends, Moody's analysts pointed out that the amount of office space per worker has been in a "general downward trend for decades."
At the peak of the Dot-Com boom, office workers used an average of 190 sq ft. The figure has since slid to 155 sq ft in 2023.
"The argument for maintaining or even increasing remote work practices remains compelling for many businesses," the analysts said, adding, "If productivity remains stable and costs can be reduced by forgoing physical office spaces, the rationale for mandating in-office attendance diminishes."
Related research from the McKinsey Global Institute forecasts that office property values will plummet by $800 billion to $1.3 trillion by the decade's end.
Moody's expects vacancy rates to top out as office towers are demolished or converted to residential ones in the coming years.
"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," they said.
Earlier this year, Goldman analyst Jan Hatzius pointed out that a further 50% price decline would make office tower conversions financially sensible.
Meanwhile, in March, Goldman's Vinay Viswanathan penned that "office mortgages are living on borrowed time."
Office stress isn't entirely done yet. The downturn is likely to persist through 2026.
Commercial Real Estate is not a good investment right now, but we keep building. Economical Systems have to work into their models the cost of disposing of these assets in an ethical way, otherwise every big city will be Wal-E world on day. Just mountains of scrap where nothing can grow.
In the Detroit area, we still have some plants that have stood idle for 50 years that have not been demolished. There are some who want to preserve them as landmarks, but they really need to go.
As the world shifts more and more back to a remote culture with less social engagement, not having the inevitable decay rationalized will cause collapse.
I appreciate how methodical the Japanese are with regard to this topic. They take down their large buildings one floor at a time and nothing goes to waste. It's something to see.
Scary stuff - there will be a massive flow on effect through to the banking system and this is already underway. In the end commercial greed will come unstuck. The chickens are all coming home to roost