Thanks to the COVID-19 induced pervasiveness of remote work, companies are looking to downsize their offices. And now that a recession looks more and more like a reality, experts are comparing the current state of the market with past financial crises to try to understand exactly how much pain is coming for office landlords. Unfortunately, looking at past financial downturns is not painting a pretty picture as each of the previous three recessions caused office occupancy levels to drop.
The percentage of U.S. office space that is currently rented is significantly lower than it was at the beginning of the 2001 recession (or the subprime crisis). Though there’s ongoing demand for office space along the Sunbelt, vacancy rates in several major cities have shot up to their highest in years. Things might look sunnier in comparison to the 2008 recession since landlords are experiencing less delinquencies now, but it seems like that optimism may be short-lived. Analysts and lenders agree that defaults are soon to follow. Now that the Federal Reserve has hiked interest rates, there’s speculation that mass layoffs and company closures may be coming
The strain of increased interest rates and lowered demand is already pushing down property values in many office buildings, and a recession is only going to make things worse. Most office leases last between five and ten years, as they expire, vacancy rates will likely rise with them if the economy is on the decline. In that case, office landlords may have to get creative with how they utilize their space, or the types of tenants they are able to sign.