From Moody’s Analytics Senior Economist Lu Chen: Office continues its bumpy ride, and Retail remains flat Office vacancy has been persistently stuck at over 18% since early 2021, a consequence of excess inventories and strains on companies’ expansion plans. Net absorption rose in June and July, in line with the return to office sentiment, but that trend was short-lived as economic uncertainties pressured the sector’s fundamentals. The 3rd quarter ended with an increase in office demand, but the 1.75 million square feet (sqft) total net absorption was less than a third of the total construction delivery of around 6 million sqft. Office vacancy moved slightly upwards last quarter, but due to rounding remained at an elevated 18.4%, near its pandemic peak. Asking rent exceeded $35/sqft ($35.04), which is equivalent of 0.4% growth compared to last quarter. Effective rent kept pace, but that’s only half its rate in Q2.
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 Q3, unchanged from 10.3% in Q2, and down from 10.4% in Q3 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.