The outlook for the U.S. office market remains bleak, with the national vacancy rate hitting another high in the first quarter of this year and losses continuing to mount on loans backed by towers across the country
The vacancy rate reached 19.8% in Q1, a new record by Moody Analytics Inc. standards and a rate that’s 50 basis points higher than the recessionary peaks in 1986 and 1991. Effective rents fell by 0.04% in the first quarter, while asking rents inched up 0.14%.
The national office market has struggled since the onset of the Covid-19 pandemic more than four years ago, but the market continues to add direct vacancy and sublease space, prompting questions of when the bleeding may stop.
There are, however, some office buildings nationally that are bucking the larger trend, even if they might be too small to register on a macro level.
Moody’s recently analyzed 7,000 U.S. office buildings that saw high rent growth between 2022 and 2023 relative to their markets’ performance, finding certain suburban office buildings to be outliers in their respective markets.
Ricardo Rosas, a data scientist at Moody’s who worked on the analysis, said the intent behind the study was to leave behind preconceived notions about which office buildings are desirable to tenants today and instead use data to figure out common characteristics of top-performing buildings.
All 10 properties identified by Moody’s are in suburban submarkets, some of which are in areas with lower Business Vitality and Consumer Amenity Volume scores — which are Moody’s measurements of how many services and amenities are close to the office buildings.
A common theme of the flight-to-quality narrative is that location — including being close to neighborhood services, retail and other amenities — is a top priority for today’s office tenants. But by locating in suburban submarkets with less overall office inventory, landlords of those properties may face less competition overall, and that could lead to consistently higher rent growth and lower vacancy rates, the Moody’s study said.
Some of the 10 buildings identified are Class B and C properties, Rosas said. That also goes against the larger narrative of tenants picking the newest or highest-quality buildings in their markets.
But, Rosas added, the B and C buildings that made the group of 10 have been recently and frequently renovated.
“It indicated that they were a lower class but still quality properties,” he said.
Another hypothesis for why buildings that weren’t close to other businesses or neighborhood services outperformed is because certain service-oriented tenants — think trades such as plumbers or electricians — that need to be close to clients, such as homeowners, wouldn’t necessarily prioritize being in a dense, mixed-use environment, Rosas said.
A metro area’s largest office buildings, typically found in central business districts, that are seeing mounting vacancy or issues staying current on their debt service tend to outweigh the smaller buildings that are performing well relative to the broader office market, Rosas said.
“There is demand for those smaller properties,” he said, adding that at the same time, the flight-to-quality trend is still happening for CBD tenants.
The study didn’t factor in pre-pandemic or pre-2022 performance of the buildings identified as top performers, nor did it consider the tenant makeup of those buildings, although several are home to medical tenants. The medical office market has outperformed the traditional office market since the pandemic, with Marcus & Millichap Co. forecasting the medical-office vacancy rate to be just shy of 10% in 2024 — a far cry from the broader office market’s surging vacancy.
Nick Villa, an economist at Moody’s, said the study can’t necessarily extrapolate patterns or trends going forward. The data covered a one-year period and, if the analysis were to be done next year, it’s likely a new set of buildings would emerge as top 10 performers.
Still, Rosas said, the outcome of the study shows there are some hidden gems in the office market.
“It’s a matter of finding out what they’re doing well,” he said. “It’s interesting to see what the landlords and tenants are finding important or useful for their office needs.”
Source: “These office buildings are outperforming the broader market. They have one thing in common.”
