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America's offices are emptier than at any time in at least four decades, reflecting years of overbuilding and changing work habits accelerated by the pandemic.
According to Moody's Analytics, a staggering 19.6% of office space in major U.S. cities was unleased in the fourth quarter, up from 18.8% a year earlier. That's slightly above previous records of 19.3% from 1986 and 1991 and the highest figure since at least 1979, as far back as Moody's data goes.
The new record shows how remote work has turned the office market on its head. But that's just one part of the story. Much of the market's current malaise dates back to the downturn in the office market in the '80s and '90s.
This increase in office vacancies in the 1980s and early 1990s followed years of overdevelopment. Easy credit sparked a construction boom, particularly in the South, where land was cheap and bureaucracy was minimal. Banks often financed speculative office projects for which no tenant was registered.
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Office space vacancies in major US cities are higher than ever before. ((Photo by ANGELA WEISS/AFP via Getty Images) / Getty Images)
“The building I built was almost a million square feet — 100% empty,” said developer Bruce Eichner, who built the 1540 Broadway office tower in Manhattan in the 1980s.
The result was a flood of office buildings that failed to find tenants as the economy fell into recession in 1990 as the country suffered from the savings and loan crisis and many S&Ls failed.
This oversupply continues to weigh on the office market today and explains why vacancies in the USA are much higher than in Europe or Asia. Many office parks built in the 1980s and earlier are struggling to find tenants as companies cut back on space or move to more modern buildings.
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Austin, Texas, was one of several cities in the Lone Star State that ranked among the nation's leaders in the number of available office spaces. (Brandon Bell/Getty Images/Getty Images)
“The majority of the vacant space is buildings that were built in the 1950s, 1960s, 1970s and 1980s,” said Mary Ann Tighe, managing director of the New York tri-state region at real estate brokerage CBRE.
And just like in the early 1990s, it is the overbuilt south that is hit hardest. According to Moody's, Houston, Dallas and Austin, Texas are now the three major U.S. cities with the highest office vacancy rates in the country. In 1991, Palm Beach and Fort Lauderdale, Florida, and San Antonio held these positions.
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The rise of remote work in the tech sector has left San Francisco facing one of the highest office space vacancy rates in the country. ((Photo by Brandon Sloter/Getty Images) / Getty Images)
Companies looking to cut costs also began replacing spacious private offices with open floors and cubicles, meaning they needed less space per employee.
“There's been a move away from the 'Mad Men' and Don Draper era of some of these big, big offices,” said Thomas LaSalvia, head of commercial real estate economics at Moody's Analytics.
This contributed to an increase in vacancies and initiated a gradual shift towards smaller offices that continues to this day. The Covid-19 pandemic merely accelerated change as companies realized they needed even less space per employee due to remote working.
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For all the similarities, there are also important differences between the two downturns. The crisis of the early 1990s ended abruptly after the economy began to boom again. Vacancies fell and companies gobbled up space. This time around, most analysts expect offices to remain empty for longer as vacancies have less to do with economic cycles and more to do with the growing popularity of working from home.
Meanwhile, the winners and losers have swapped places. According to Moody's, San Francisco had the third lowest office vacancy rate in the country in 1991. Today, the city has some of the emptiest offices in the country, in part because the big tech sector has enthusiastically embraced remote work.