In the second quarter of 2024, the office sector’s vacancy rate hit an all-time high of 20.1%. This was the first time the 20% threshold had been breached in nearly 50 years of Moody’s Analytics data history. While the vacancy rate has remained basically the same, there was a slight change at the close of the third quarter. After nearly two years of steady increases, the national vacancy rate ticked down ever so slightly in October by 10-basis points to 20%.
The slight compression in the vacancy rate was likely attributed to net absorption, the difference between the amount of space leased and the amount vacated, turning positive. That was to the tune of approximately 6 million square feet in the third quarter after posting seven consecutive quarters of declines. Still, the office sector will continue to remain one of the more challenged property types with Moody’s baseline forecast expecting its vacancy rate to peak in late 2025 or early 2026.
While a 20% vacancy rate is the current benchmark across the United States, there are, of course, several metros whose central business districts well exceed this level. In the Western region, for example, the average office vacancy rate for these central cores among the 17 metros used in
the analysis was 360-basis points higher than its regional average at 24%.
“The office sector will continue to remain one of the more challenged property types with Moody’s baseline forecast expecting its vacancy rate to peak in late 2025 or early 2026.”
This was the widest gap among regions between central business districts and regional vacancy rates. Moreover, despite the four remaining regions all having a lower vacancy rate for these districts than its
regional average, the U.S. central business district vacancy rate was slightly higher at 20.3%.
Although the difference between these rates was largest for the West, on an absolute basis, the Southwest region had the highest central business district office vacancy rate at 24.3% — just slightly higher than the West’s 24%. Notably, the bottom three metros from the Southwest were all located in Texas and included Dallas (34.4%), San Antonio (31.4%), and Austin (30.4%) The unwanted accolade of having the highest office vacancy rate for a core business district went to Dayton, Ohio (37.5%).
Overall, among the 78 primary metros used to derive these statistics, the bottom five markets all had a vacancy rates for these central business districts above 30%. The top five markets, however, were all below the 13% threshold, with New Haven, Connecticut, ranking first at 8.3%.
Additionally, about half the metros had a central business district vacancy rate that was higher than its overall metro’s average. In other words, while office performance relative to its entire metro is fairly balanced across the sample size — with roughly half of central business districts outperforming their metro and the other half doing worse — the delta between top- and bottom-performing markets is significant.
This suggests how any ensuing office recovery is likely to be asymmetrical with certain cities or districts rebounding more swiftly due to factors such as economic resilience, sector composition and the adaptability of existing office spaces.
In short, central business districts are often viewed as a barometer for the underlying metro and while the pandemic has certainly obfuscated this relationship, they nonetheless remain epicenters of economic activity and have a disproportionate impact on regional growth and employment. With a more favorable macroeconomic backdrop on the horizon in 2025, signs are starting to show that the capital markets are nearing a bottom.
Still, as the above data suggests, a rising tide is unlikely to lift all boats. In other words, even with a more accommodative monetary policy, there will continue to be market- and submarket-specific office sector winners and losers.
