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U.S. offices are emptier than at any time in at least the past 40 years, reflecting years of over-building and shifting work habits accelerated by the pandemic.
A staggering 19.6% of office space in major U.S. cities was unleased in the fourth quarter, up from 18.8% a year earlier, according to Moody's Analytics. This slightly beats the previous record of 19.3% set in 1986 and 1991, and is the highest since at least 1979, as far as Moody's data is known.
This new record shows how remote work has transformed the office market. But that's only part of the story. Much of the current market downturn traces its roots back to the office market downturn of the '80s and '90s.
The surge in office vacancies in the 1980s and early 1990s came after years of overbuilding. Easy financing spurred a construction boom, especially in the South, where land was cheap and bureaucracy was sparse. Banks often financed speculative office projects with no tenants under contract.
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Office vacancy rates are at record highs in major U.S. cities. ((Photo by Angela Weiss/AFP via Getty Images)/Getty Images)
“The building I built was almost a million square feet and 100 percent vacant land,” said developer Bruce Eichner, who built the Manhattan office tower 1540 Broadway in the 1980s.
As a result, when the country suffered a savings and loan crisis in 1990, the economy went into recession, and many S&Ls went bankrupt, there was a glut of office buildings that could not find tenants.
This excess still weighs on the office market to this day, and helps explain why vacancy rates in the United States are much higher than in Europe and Asia. Many office parks built before the 1980s are struggling to find tenants as companies downsize space or move to more modern buildings.
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Austin, Texas was one of several cities in the Lone Star State that ranked among the highest in the nation for office vacancy rates. (Brandon Bell/Getty Images/Getty Images)
“Most of the vacant space is in buildings built in the 1950s, '60s, '70s and '80s,” said Mary Ann Tye, chief executive officer of the New York tri-state area for real estate brokerage CBRE.
And just like in the early 1990s, the overbuilt South is hardest hit. According to Moody's, the three major U.S. cities currently have the highest office vacancy rates in the country: Houston, Dallas, and Austin, Texas. In 1991, Palm Beach, Fort Lauderdale, and San Antonio in Florida held that position.
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San Francisco faces one of the highest office vacancy rates in the country as the tech industry embraces remote work. ((Photo by Brandon Sloter/Getty Images) / Getty Images)
Companies eager to cut costs have also started ditching spacious private offices in favor of open floor plans and cubicles, reducing the amount of space needed per employee.
“Some of these big offices have seen a shift from the Mad Men Don Draper era,” said Thomas LaSalvia, head of commercial real estate economics at Moody's Analytics.
This led to an increase in vacancies and a gradual transition to smaller offices, which continues to this day. The COVID-19 pandemic has only accelerated that change, as companies realize that remote work means they need even less space per employee.
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While there are similarities between the two recessions, there are also important differences. The crisis of the early 1990s ended abruptly after the economy began to boom again. Vacancies have plummeted and companies are eating up space. This time, most analysts expect office vacancies to remain vacant for an extended period of time, as vacancies have less to do with business cycles and more to do with the growing popularity of working from home.
During that time, the winners and losers changed places. In 1991, San Francisco had the third lowest office vacancy rate in the nation, according to Moody's. The city currently has some of the most vacant office spaces in the country, in part because its large technology sector has embraced remote work enthusiastically.
