- Office delinquency rates are projected to exceed 14% by 2026, up from 11% in late 2024, as vacancies and hybrid work pressure rents.
- Overbuilding in markets like Austin and revenue declines in cities like San Francisco highlight uneven office recovery trends.
- Strong amenities and shorter commutes provide a competitive edge for office markets in areas like Midtown Manhattan.
Moody’s latest report predicts worsening office sector conditions through the end of 2025, as reported by GlobeSt.
Deeper Dive
While stabilized long-term rates may offer some relief to property valuations, Moody’s anticipates office delinquency rates will surpass 14% by 2026, compared to 11% in November 2024.
Vacancies are expected to remain elevated, and rents will decline as tenants downsize amid widespread hybrid work adoption.
These trends are giving occupiers greater leverage in lease negotiations, forcing landlords to reset rents lower.
Get Smarter about what matters in CRE
Stay ahead of trends in commercial real estate with CRE Daily – the free newsletter delivering everything you need to start your day in just 5-minutes
Subscribe
Divergent Outcomes
Overbuilding has exacerbated challenges in certain cities. In Austin, despite robust office-using employment growth exceeding 30%, asking rents have fallen by approximately 10% due to an oversupply of space.
Since the pandemic began, San Francisco has seen the sharpest revenue declines among major markets.
Conversely, markets with shorter commute times and strong amenities—like Midtown Manhattan—are faring better. Proximity to major transportation hubs has kept revenue steadier in these areas compared to more remote office locations.
Have vs. Have-Nots
The office market’s recovery has underscored a stark contrast between properties with strong capital investment and those struggling to attract tenants. Upgraded amenities can boost a building’s appeal, but they require significant financial backing.
Interestingly, office markets with mid-teens pre-pandemic vacancies, such as Atlanta, Dallas, Houston, and Los Angeles, have been less affected by hybrid work. Their low pre-2020 rents limited the financial impact of shifting workplace trends.
Looking Ahead
The US office market will likely face turbulence as landlords contend with weak demand, rising vacancies, and tenant downsizing.
However, properties that prioritize tenant convenience and invest in high-quality amenities may find opportunities to mitigate some of these challenges.
