Mar 16, 2023 - Economy

The long-anticipated office reckoning is upon us

Data: Moody's Analytics; Chart: Axios Visuals

Office vacancy levels are approaching highs last seen during the savings and loan crisis in the 1980s.

Why it matters: It appears that a reckoning in the office market, widely anticipated since the start of the pandemic, is upon us.

  • "We're not ready to say that this is a cliff for the office sector. But I think right now we're finally entering the true turbulent times," Thomas LaSalvia, director of economic research at Moody's Analytics, told Axios.
  • Context: Vacancies refer to the share of office space that is not leased by a tenant — as opposed to leased office space that’s mostly deserted.

Zoom out: This was always going to be a slow-moving trend. Remote work drove folks home, but companies didn't instantly give up on their office spaces. Typical leases run for at least 10 years.

  • And for property owners dealing with rising vacancies, there's a new wrinkle: They're getting hit with rising costs thanks to higher interest rates on their floating rate debt.

State of play: At the end of last year, even Class A buildings saw a drop in occupancy, per a new report from Moody's.

  • Some office landlords are showing signs of distress, as the WSJ reported. Brookfield Asset Management last month defaulted on $750 million in debt on two 52-story office towers in Los Angeles. (It still holds hundreds of properties.)
  • These properties were Class A, but faced competition from even-fancier Class A+ properties with better amenities, according to Moody's report. Brookfield's moves might "spur other landlords," it says.
  • Meanwhile, Columbia Property Trust recently defaulted on a $1.7 billion loan backed by seven office properties, mainly due to the rise in interest rates.
  • The company took out a floating-rate loan in December 2021, according to Moody's. It's gone from paying around 3% on the loan to 6%.

The bottom line: Office space is a good place to start cutting back if you're a CEO looking to batten down the hatches in a turbulent time.

  • Rather than lay off workers during a time of labor shortages, companies are looking to real estate as a way to cut costs, said LaSalvia.
  • "The low-hanging fruit is definitely that office space," he said.
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