Remote working and companies’ decisions to reduce their physical footprint in anticipation of slower economic growth have led to more vacant office space across the US than ever before.

In the first quarter of 2023, average office vacancy rates in the US national market stood at 18.6%, which was 5.9 percentage points higher than the last quarter of 2019, according to the latest projections from Cushman & Wakefield, a commercial real estate services company.

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At the same time, new supply of office space across the US stood at 4.54 million square feet (msf) in the first quarter of this year, around 21.5% of the level seen in the last quarter before the Covid-19 pandemic.

Rebecca Rockey, deputy chief economist at Cushman & Wakefield, tells fDi that while nationally, US office vacancies are at their highest on record, the headline figures mask a “tremendous amount of variation” between different metropolitan areas.

“We’re now in a market-driven cycle,” she says, noting that the higher national vacancies are the result of a shift to working from home and an “anticipation of an economic downturn and business wanting to cut costs”, as well as some tech companies unwinding their over-expansion during the pandemic. Cushman & Wakefield expect vacancy rates to keep rising until the second half of 2023.

There is some nuance to the increasingly empty offices, however. More than 60% of the roughly 52,000 US office buildings tracked by Cushman & Wakefield still have vacancy rates of less than 10%, showing there remains significant demand among occupiers to lease these buildings. However, the most concerning trend is the “concentrated weakness” seen in vacant lower-quality buildings and in particularly hard-hit metropolitan markets, according to Ms Rockey, who notes that over 7% of US offices are at least half empty. 

The worst affected US metropolitan area is San Francisco, which has seen a sharp fall in demand for office space as companies have downsized or moved to other parts of the country. Between the last quarter of 2019 and the first quarter of 2023, office vacancy rates in the Californian tech hub rose from 5% to 24.8%, according to Cushman & Wakefield data. Meanwhile, there has been no new supply of office space in San Francisco since the first quarter of 2022.

Ms Rockey notes that there is a “confluence of factors driving vacancy in any given market” and that vacancy may be higher in some cities due to new construction and supply rather than a fall in demand. This includes cities such as Austin in Texas, Raleigh-Durham in North Carolina, and Salt Lake City, Utah.

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Office demand and supply imbalances have been prolonged further by higher interest rates and tighter financial conditions. Several major real estate owners have recently defaulted on their loans and asked to hand back the keys to these assets to the banks. For example, in February 2023, Canadian asset manager Brookfield walked away from two prime office buildings in Los Angeles after defaults on $784m-worth of loans.

Mark Rose, who has been CEO of global real estate advisory firm Avison Young since 2008, says until now he has “not seen the level of givebacks of [office] buildings” that he has in the past few months.

According to Cushman & Wakefield, as much as 330msf of office space could become obsolete in the US by 2030, because it does not support companies’ demands for buildings fit for hybrid working, energy efficiency and their environmental, social and governance (ESG) goals.