Office landlords are in store for retail redux
Offi c e landlords are in store for pain, but there’s a light at the end of the hallway. Though vacancy rates in the United States recently hit a 30-year high, owners of retail space – shopping malls and grocery stores – have shown that a bounce back is possible.
A reset is in store, but the best office landlords can make it, too.
Empty space in office buildings is on the rise. Approaching a fifth of the office space in the United States was vacant as of the first quarter this year, according to commercial real estate service and investment firm CBRE.
The rate is expected to peak in the second half of 2024. That’s more than twice as high as it was in 2000 though the sector neared similar levels in 2009 during the great recession.
Working from home is a big culprit. Kastle, which tracks key card swipes in office buildings in 10 cities across the nation including Dallas, New York and San Francisco, found the average occupancy rate during the week of May 3 is just a hair under 50 per cent. But compounding the problem are wide-scale layoffs as companies hunt to cut costs. Leases are a good place to start. That’s an ominous sign for the near term. But retail real estate, which includes everything from malls to shopping centres, went through its own misery. Twin forces of the rise of e-commerce coupled with an economic downturn in 2008 left many store owners in the lurch.
Right before the financial crisis in 2007 there was roughly 7 billion of square feet of retail space with about 170 million square feet added to the market that year.
But malls emptied out in the years following and the vacancy rate was nearly 10% from 2009 through 2011.
Rent per square foot went from $21.14 in 2007 to $19.24 in 2011. But then the industry right-sized.
New construction dropped 85 per cent between 2006 and 2022, according to CBRE. People returned to shopping centres in the wealthiest areas, like Short Hills, New Jersey. The average asking rent per square foot, after 11 years, bounced back and in 2022 hit an average $22.87.
Landlords of office buildings, such as Vornado Realty Trust and Boston Properties, may find they are on a similar decade-long trajectory. In the first quarter, new building plummeted 58 per cent to 2.7 million square feet compared to the prior quarter, according to commercial real estate services firm JLL.
Effective rents are on the decline too, approximately 9 per ccent quarter-overquarter. It might be a slog, as retail shows, but office could be in store for a redux.