Office Vacancy Rate Hits Record High... "US Commercial Real Estate Downturn to Prolong"

US Rent Increase Soars to 13.6%
Expected to Exceed 17% by End of 2026, Peaking
Half of Lease Contracts Signed Before Pandemic
Likely to Surge Further Upon Maturity

The U.S. commercial real estate market, shivering from a vacancy cold wave, is expected to contract even more significantly next year. As office vacancy rates soar to record highs, warnings have emerged that commercial real estate defaults could become a new crisis trigger.

On the 19th (local time), The Wall Street Journal (WSJ) reported that many office building investors will face a wall of loan maturities after next year, and with it becoming increasingly difficult to find new tenants, commercial properties will flood the market at bargain prices.

According to the U.S. commercial real estate data analytics firm Costar Group, the overall office vacancy rate in the U.S. has surged to a record high of 13.6%. Considering it was 9.4% at the end of 2019, just before the COVID-19 pandemic, the number of vacant offices nationwide has significantly increased.

The U.S. office vacancy rate is projected to peak at over 15.7% by the end of next year and exceed 17% by the end of 2026. Costar Group pointed out, "About half of the current office lease agreements were signed before the pandemic, and as these leases expire, vacancy rates could rise even more sharply."

[Image source=Reuters Yonhap News]

The contraction of the U.S. commercial real estate market is due to a sharp decline in structural demand for offices following the expansion of remote work and an economic downturn after the pandemic. With the rise of remote work, the average office attendance rate of employees in major U.S. cities has dropped to about half of pre-pandemic levels. According to Scoop Technologies, the proportion of companies allowing hybrid work?a mix of remote and office work?has surged from 51% in the first quarter of this year to 62% in the fourth quarter.

Along with these structural changes, commercial real estate is facing a major price correction phase due to perceptions of overvaluation from rapid price increases, rising financing costs caused by prolonged high interest rates, and macro-financial uncertainties such as economic slowdown. Persistently falling real estate prices and long-maintained high loan interest rates are also obstacles. Since the pandemic, rising office vacancies and high interest rates have lowered collateral values, making refinancing more difficult.

Major foreign media outlets including WSJ noted, "Office building owners facing the wall of loan maturities are struggling to repay debts, intensifying fears of defaults among small and medium-sized banks with high exposure to commercial real estate loans." Poor borrowing conditions such as low returns and high financing costs in commercial real estate continue, and defaults on commercial real estate loans due to inability to repay or early repayment demands could lead to the insolvency of small and medium-sized banks. These banks, which have relatively weak financial structures, hold about 70% of commercial real estate loans.

Some warn that commercial real estate could spiral into severe turmoil, potentially reaching disaster levels. Real estate data analytics firm Trepp forecasted that commercial real estate delinquency rates will exceed 8% in the second half of next year. Steven Bushbaum, Trepp’s Research Director, pointed out, "If companies accelerate office downsizing due to profit pressures from economic recession and rising financing costs, the commercial real estate crisis could become a new disaster."

This content was produced with the assistance of AI translation services.