There are “further shadows on the future off the office,” according to Moody’s Analytics’ most recent analysis on the office market, which covers the fourth quarter of 2022.
Even now, after the pandemic’s initial peak, forced closures, work-from-home laws, and when businesses started to reevaluate how they would function, the national vacancy rate has risen to a record high of 18.7%. The pandemic peak, which was reached in the second and third quarters of 2021 and 2022, was 18.5%.
The average asking rent increased from one quarter to the next by 0.3% ($35.05 to $35.14), while effective rates increased by 0.1% ($28.00 to $28.04). But when the number of openings increases more quickly than the effectiveness of fentanyl, that is at best a tarnished silver lining. Furthermore, those real rates are just 80% of what is desired, raising concerns about how businesses view the value of office space.
The high-tech industry was one of the main contributors to the rise in the vacancy rate. “Big technology companies that had for some years tended to boost office demand began cutting headcounts and office space in 2022, with layoffs becoming more frequent. Moody’s wrote. “Across the sector, there were more than 97,000 announced job cuts in 2022, citing cost-cutting as the top reason. With the layoffs, companies are reducing their office space to manage operating margins. Meta (Facebook), Salesforce, Lyft, etc. all made the headlines by shedding millions of square feet of office space across the country. This trend contributed to the weak office sector performance in the fourth quarter of 2022.”
Tech firms have a history of operating with a boom-and-bust attitude. When things are booming, the industry as a whole, led by the biggest companies, hires more people than they actually need, expecting that trends will hold or that some new innovation would take the globe by storm. Rarely occurs because retreats occur frequently, although frequently being smaller than advances.
According to Moody’s, “given the persistence of hybrid work, companies are more likely to target underutilized office space to manage operating costs if economic conditions worsen”, although many large companies have already begun taking steps to reduce their real estate spend.
For instance, Salesforce recently announced plans to reduce its personnel by 10% while incurring expenditures of $1.0 billion to $1.4 billion for layoffs and an additional $450 million to $650 million for reduced office space.
According to Moody’s, additional businesses will probably take similar actions if a recession occurs in 2023.
