By Ashley Fahey – Editor, The National Observer: Real Estate Edition, The Business Journals
The U.S. office vacancy rate has begun to stabilize — and dip ever so slightly, according to some industry trackers — but it's still not likely to hit bottom for another several quarters.
The nation's office vacancy rate declined to 20% in the third quarter, down just barely from 20.1% the previous quarter, according to Moody's Analytics Inc. While the quarterly decline may be a positive indicator for the market, the national vacancy rate is predicted by the firm to move up and down more before settling into a new normal.
More precisely, Moody's is forecasting the national office market won't hit bottom on a vacancy basis until late 2025 or early 2026.
Matt Reidy, director of commercial real estate economics at Moody's, said office vacancy tends to move more slowly than other market metrics because of how long most office leases are — 10 or more years, in many cases. That means a significant share of leases haven't matured since the Covid-19 pandemic upended the office market.
"We’re still seeing some companies just now getting their first [lease] rollover since the pandemic and turning some of that space back over," Reidy said.
And while the vacancy rate could rise in the coming quarters, there are a number of counterbalancing forces to help keep the rate from growing too much, Reidy said. That includes a slowdown in new office construction, which is likely to continue next year, as well as gains in office-using employment.
The third quarter saw a dip in office vacancy nationally because net absorption turned positive — with more than 5 million square feet of absorption tracked by Moody's — after seven consecutive quarters of decline.
Speculation has been rampant about whether more return-to-office efforts in 2025 — fueled by Amazon.com Inc. CEO Andy Jassy's announcement this fall that the tech giant's employees would be required in the office five days a week starting in January — will turn into more space demand.
But it's tough to say beyond a few headline-grabbing moves whether many more companies will be going back to the office more days per week in 2025, Reidy said.
"We’ve seen those [announcements] coming in fits and starts since the pandemic, where you'll get several companies that will announce pretty close to one another that they’re either going fully in-office or hybrid or fully remote," he said. "It’s difficult because employees have made their feelings heard: They have a strong preference for at least having flexibility in a hybrid environment."
And as long as the labor market remains strong, employees still have some leverage when it comes to hybrid-work arrangements, Reidy said.
One potential factor to watch next year is whether the federal government — the nation's largest office occupier — pares back its real estate. Elon Musk and Vivek Ramaswamy, who've been appointed to lead a new Department of Government Efficiency within the incoming Trump administration, have talked about instating full in-office work requirements for the federal workforce, in addition to significant job cuts.
Any reduction in the federal workforce likely will mean less office-space needs for the federal government. The General Services Administration, which oversees the federal government's real estate portfolio, currently leases more than 363 million square feet of office space nationally.
"If there’s a mass wave of government layoffs, clearly that’s going to cause a lot of additional vacancy," Reidy said, although he added there's typically a fairly long lead time on GSA's real estate planning.
Additionally, other Trump economic policies could influence the direction of the economy and, by extension, how companies think about job growth and their real estate requirements. It remains too soon to say with certainty what impact those policies might have.
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