Office vacancies hit record high

Companies simply don't need as much office space these days.

Why it matters: The pandemic triggered a permanent, fundamental shift in how people work.

The latest: Vacancy rates hit a record high in the first three months of the year, per data Moody's shared exclusively with Axios.

By the numbers: 21% of the office space across 79 markets in the U.S., mostly cities, was vacant in the first quarter — up from 17% in 2020.

Zoom in: Although the return-to-office trend was certainly real, plenty of people still work remotely or on hybrid schedules.

• That means office spaces have shrunk — continuing a pre-pandemic shift in which employers leaned toward more collaborative workspaces, with fewer cubicles and personal offices, Moody's says.
• There's also been a surge of interest in pricier premium spaces known as Class A. Some companies are choosing to downsize into these kinds of offices — trading off extra space for prem-o property.
• "Companies are adjusting to decreased office space requirements as flexibility and collaborative environments for in-office days have become the norm," writes Moody's associate economist Nick Luettke.

Follow the money: The slowing labor market and questions over how the AI transition will shake out are also holding back demand for offices.

The big picture: Even after an aggressive return-to-office push by employers, workers spend about a quarter of their working days away from its confines — compared with 7% in January 2020.

Friction point: The still surging vacancy rate is a sign of just how slow the commercial real estate market moves.

• There are long leases in the office sector, five or even 10-year terms, and companies change their arrangements slowly.

What to watch: With the whole sector changing, the "office" is getting a rebrand, write the authors of another soon-to-be-published report from Moody's commercial real estate team.

• Out: offices in isolated central business districts.
• In: workspaces that are more integrated into their surroundings, close to residential areas and featuring hybrid-friendly spaces. Food options don't hurt either.
• "More than ever, the office is no longer viewed solely as a place to work, but as a tool to attract and retain young talent, reinforce company branding, and elevate the in‐person experience," write the authors of the report.

Between the lines: The office transformation is similar to what's happened to the retail sector. Brick-and-mortar stores had to adapt to online shopping and become more enticing to shoppers by being more experiential.

The bottom line: The office as we knew it is changing for good.