Empty offices risk wiping out $250bn in commercial property value

Office-vacancy rates are expected to rise to 24% from 19.8% in the first quarter of this year in the US, reducing revenue for office landlords by between $8 billion and $10 billion when combined with the impact of lower rents and lease turnovers, the authors of the report said. That, in turn, could translate into “property value destruction” in the range of a quarter-trillion dollars, Todd Metcalfe, Moody’s associate director of commercial real estate (CRE) forecasting, and Tom LaSalvia, Moody’s head of CRE economics, said in a separate analysis that’s not contained in the report.

The figures illustrate the gloomy prospects faced by property owners and lenders as employers continue to jettison square footage or shift from multi-year leases to shorter-term and more flexible co-working arrangements. A full 85% of North American organizations polled by brokerage Jones Lang LaSalle Inc. have implemented hybrid work, and occupancy across offices in major US cities is stuck at about 50% of pre-pandemic levels. Wavering demand and increased borrowing costs have slammed office valuations, especially among older buildings.

“The argument for maintaining or even increasing remote work practices remains compelling for many businesses,” the Moody’s authors said. “If productivity remains stable and costs can be reduced by forgoing physical office spaces, the rationale for mandating in-office attendance diminishes.”

Moody’s analysis focused on white-collar sectors that have highest work-from-home rates and also account for the lion’s share of office property in the US, such as the finance, information, real estate and administrative sectors. It controlled for those who worked from home before the pandemic, and accounted for the ongoing decline in office space allotted per worker, which began after the 2008 financial crisis and has accelerated since then.

Using multiple sets of government and academic data including the Survey of Working Arrangements and Attitudes, Moody’s determined that office workers today need about 14% less office space than they did before the pandemic. The figure corresponds to research from the McKinsey Global Institute, which concluded that there will be 13% less demand for office space in a typical city globally by 2030. McKinsey also found that office-property values will decline by anywhere between $800 billion and $1.3 trillion over that time period.

Eventually, the Moody’s authors said, vacancy rates will plateau as enough offices are torn down or converted to other uses like warehouses or residential property.

“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 said.