From Moody’s Analytics Senior Economist Lu Chen and economist Xiaodi Li: Apartment struck a balance, Office demand plummeted, and Retail remains flat Corporate profits squeezed under macroeconomic uncertainties and flexible work arrangements weakened office demand and continued to transform the sector’s fundamental. Moreover, new office demand isn’t always reflected through direct leases. As office downsizing became more commonplace, sublet space inevitably followed to absorb new demand. Net absorption plummeted from over 3 million square feet (sqft) in Q3 to -7.13 million sqft in Q4.
Affected by the overall office sector sentiment, new delivery dwindled to slightly above 2 million sqft nationwide, the lowest quarterly delivery in our more than 20 years of tracking history. Vacancy climbed for the fourth straight quarter to 18.7%, 20 bps higher than the previous quarter or 60 bps higher than the same time last year. Compared to Q3, asking rent in Q4 increased by 0.3% (from $35.05 to $35.14), and effective rent edged up 0.1% (from $28.00 to $28.04).
This graph shows the office vacancy rate starting in 1980 (prior to 1999 the data is annual).
For Neighborhood and Community malls (strip malls), the vacancy rate was 10.3% in Q4, unchanged from 10.3% in Q3, and unchanged from 10.3% in Q4 2021. For strip malls, the vacancy rate peaked during the pandemic at 10.6% in both Q1 and Q2 2021.
This graph shows the strip mall vacancy rate starting in 1980 (prior to 2000 the data is annual). The regional mall data starts in 2000. Back in the ’80s, there was overbuilding in the mall sector even as the vacancy rate was rising. This was due to the very loose commercial lending that led to the S&L crisis.
In the mid-’00s, mall investment picked up as mall builders followed the “roof tops” of the residential boom (more loose lending). This led to the vacancy rate moving higher even before the recession started. Then there was a sharp increase in the vacancy rate during the recession and financial crisis.
In the last several years, even prior to the pandemic, the regional mall vacancy rates increased significantly from an already elevated level.