Green Street



Deceptive Optimism In CRE Office Vacancy Rates

Examining how Office occupancy is projected to show different shaped recovery than the optimistic “V-shaped” bounce back.

Some market participants are beginning to forecast long-awaited changes in CRE office vacancy rates. But it seems as though certain secondary factors are not being considered with these optimistic projections. New Green Street data shows that without considering additional supply and modern corporate policy towards in-office work, these projections seem to be out of touch with the wider scope of the office occupancy dilemma.  

New Green Street data gives the complete picture in our recent report “The Black Hole of Office Occupancy” as we dive into the deeper interconnected issues changing the tone of these overly optimistic projections.  

Now, even based on insights from March of ’23, hope for optimistic forecasts regarding CRE office vacancy rates is understandable given the long and cascading fall of office demand since the pandemic first began in ’19. According to Wall Street Journal, the WFH (work from home)  hybrid culture, coupled with the increasing focus on cost-conscious corporate budgeting, has created a massive dive in square footage with spikes in availability and vacancy – a bad trio for any office occupancy calculation.  

Some market experts believe that these numbers represent a hard bottom to the office occupancy problem that will likely be bouncing back strong with a what Investopedia has called V-Shaped recovery. But this is quite likely an over-optimistic interpretation of the situation. There are two theories to how the market will likely recover – and the optimistic one is far less likely when considering all the factors.  

What factors aren’t being considered in the optimistic “V-shaped” recovery projections are the rates of both new office supply and the in-office job growth. Ignoring these two numbers could give you the expectation that the rapid recovery forecast is reliable. However, the theory fails to consider the dark reality of how deep in the (black) hole CRE office vacancy is currently. 

“The last four years of disruption in the office market have been the worst on record The cumulative amount of office space vacated since ’19 surpasses the amount seen during the dot-com bubble and dwarfs that of the Global Financial Crisis.”  

– Dylan Burzinski, Green Street’s lead office analyst 

Not only that, but the theory also fails to account for compounding factors such as an absorption rate of supply equal to that of 2019 pre-pandemic levels. Given the refocusing of work what the Harvard Business Review defines as the  WFH and hybrid models, such an absorption rate is highly unlikely. Additionally, while the in-office growth rate continues to decline, new office supply has steadily moved in the opposite direction.  

It’s safe to say that instead of the dials shifting in favor of a V-shaped, 5-year recovery (which is already an aggressive assumption given it took the market 11 years to recover from the Global Financial Crisis alone) we could very well be looking at a recovery rate at nearly twice that. 

The deeper data analysis on the situation can be found by requesting the report and further Green Street data in the form below. Be sure not to miss out on the reality of the Black Hole Of Office future and what you can – and should be doing – to adjust your underwriting for more profitably pessimistic purchases.  

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