The Reasons Behind the Record High Office Vacancies in the U.S.

In the 4th quarter of 2023, office vacancies in the US reached a record high of 19.6%, surpassing pre-pandemic levels and breaking previous records set during the economic crises of 1986 and 1991. The shift in work models and disruptions in the tech sector have significantly impacted office rental markets in certain metros. However, these changes have also stimulated growth in some areas.

Office vacancies serve as a barometer of the country's economic and social development. By examining the office vacancy rates in various cities, we have some key findings:

• The top three cities with the highest vacancy rates are Detroit (25.4%), Houston (24.3%), and San Francisco (23.7%) as of January 2024.

• Historically, layoffs have been a major driver of high office vacancy rates. However, in today's post-pandemic era, the increasing hybrid work models and corporate relocations are reshaping the real estate landscape.

• The demand for office space is decreasing, with more employees working remotely and commuting longer distances.

• In the last decade, 214 companies left California, with half relocating to Texas. The trend of companies moving out of California has escalated since 2019.

Cities show social changes through their high office vacancies

In Detroit, the office vacancy rate has risen to 25.4% with a non-stop upward trend, signaling long-standing economic challenges linked to the decline of the auto industry. This has also led to an ongoing trend of residents leaving the city in search for better opportunities, contributing to the sluggish office real estate in this city. Even the rock-bottom price of office buildings with $39.13 per sq ft per year failed to reverse the downward trend and ultimately led to an 5.5% increase in office vacancies over the past 12 months.

Following Detroit, Houston has the second-highest office vacancy rate of 24.3%. However, the city has experienced a slight improvement with a 1.7% decrease due to the influx of companies relocating from California and other states. Despite challenges such as oversupply of outdated offices, the office market in Houston continues to show signs of growth.

In San Francisco, the high office vacancy rate is part of a nationwide trend influenced by the lasting effects of the pandemic on work practices and corporate relocations. The occupied office space per worker in the U.S. has decreased by 8% over the past four years, reaching a record low ratio. Apart from that, it also has the highest office rental prices. CouponBirds research shows that many people are leaving California due to soaring housing prices and property taxes. The office vacancy rates in San Francisco are expected to keep rising.

Unemployment is a catalyst for office vacancies

During the economic downturns, layoffs have become increasingly prevalent, especially within the tech sector. As seen in San Francisco, the correlations between unemployment and office vacancies were strong before the pandemic. When the pandemic hit, layoffs and unemployment rates increased rapidly, causing a surge in office vacancies.

Despite the drop in unemployment rate in 2022 and 2023, office vacancies continue to rise. San Francisco Mayor London Breed's proposal of tax breaks for companies moving to San Francisco might not completely resolve the skyrocketing office vacancy rates. The shift to hybrid work models and company relocations post-pandemic is now having a significant impact on office vacancy rates.

The 6th era of work is driving an increase in office vacancies

With the shift to the 6th era in the geography of work - hybrid work era due to the pandemic, the demand for physical office space is decreasing. The proportion of employees working from home has surged significantly since 2020. 12.7% work fully remotely, while 28.2% have a hybrid schedule. This trend is particularly notable in consulting services and government sectors, with the District of Columbia seeing a significant rise in remote work due to its large consulting market and high percentage of federal workers.

As digital technology advances, it will further influence how workspaces are utilized, potentially reducing the need for traditional office space. The global desk-per-employee ratio is projected to reach 50% to 55% in the coming years, reflecting the widespread adoption of hybrid work models. Office real estate is expected to adapt by offering flexible workspace options to accommodate this shift. Hybrid work enables employers to live farther from their workplaces, with an average distance increasing from 10 miles in 2019 to 27 miles in 2023.

Corporate relocations as a double edged sword for states with companies moving in and out

Corporate relocations have also significantly impacted office vacancies. Florida, as the most popular destination for companies relocating in recent years, boasts a flourishing office market with Miami's vacancy rate at only 9.6%, far lower than the national average of 19.6%.

On the other hand, regions with outgoing companies are struggling with high office vacancy rates. For example, Microsoft's relocation resulted in a 39.1% vacancy rate in the I-90 Corridor, particularly affecting the Bellevue CBD. California is also facing high vacancy rates due to numerous company relocations since the pandemic.

Over the past decade, a total of 214 companies have relocated from California. Among these companies, a significant 50% have chosen to move to Texas. Notably, the exodus of companies from California has seen a marked uptick starting in 2019, with the apex in 2021.

Methodology

We collected data from CommercialEdge to analyze office vacancy rates in different cities and identify the main reasons for high office vacancies.

Then, we explored the connection between unemployment rates and office vacancy rates using data from City and County of San Francisco and the Bureau of Labor Statistics.

We also looked at the present and future desk-per-employee ratios from CBRE to understand the demand for physical office space. Additionally, we used remote work rates in the Top 5 states from the Census Bureau to figure out which sector is showing reduced demand for physical office space.

Finally, we analyzed the potential connection between corporate relocations and office vacancy rates based on data from the Bureau of Labor Statistics.

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