The general view of the office market is that it faces trouble. And that is true from an average view of vacancies, rent growth, falling valuations, and loan performance. WeWork’s intention to renegotiate most of its leases with property owners shows the types of pressure that are bearing down.
However, average performance is deceptive as it doesn’t show distributions that may be important in an analysis. For example, in the first half of this year, there were markets in which sales of smaller to mid-sized office properties, between $5 million and $25 million, increased and others where they decreased on a half-year basis between 2022 and 2023. In the top 20 metros by sales in this range, six saw growth while 14 fell.
Moody’s Analytics CRE made this point of a need for more detail in a new report that looked at office properties in two categories: skyscrapers with 20 or more floors, and then low (five or fewer floors) and medium-sized (six to 20 floors).
“Office demand has been crippled from extended hybrid work arrangements, elevated cost of capital, and economic uncertainties,” wrote Moody’s senior economist Lu Chen of the general market. “Downsizing, consolidating, or even slashing physical office space drove the national office vacancy to 18.8%, inching closer to its historical twin peaks at 19.3% – one during the high-inflation-high-interest Volcker period and the other during the Loans and Savings Crisis in the 1990s.”
But Moody’s found that its “office data indicates these larger buildings have seen their average vacancies continue to rise over the past six months, while small and medium sized buildings actually experienced vacancy declines during the same period of time.”
Going further, “buildings in metros with a moderate amount (20-50) of high-floor skyscrapers struggled more compared to their larger and smaller counterparts. Nine US metros possess 20-50 high-floor office properties, and 89% of metros (or eight of the nine) experienced average vacancy increases among their high-floor buildings in 2023.”
But while this was a general trend, it also can be misconstrued because of missing detail. New York City and Chicago saw vacancy declines in their large office buildings — New York dropping from 13.4% to 13.2% even as overall office vacancy there went from 11.9% to 12.2%, and Chicago, which had an overall vacancy rate decline and large building vacancy rates went from 10.5% to 9.9%.