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Empty Offices, Busy Malls: The Paradox of U.S. Real Estate in 2023

We can blame it on COVID-19, remote work, the inevitable emergence of the hybrid work schedule, or all three, but the national office market continues to grapple with high vacancy rates. And the top-tier markets are seeing the worst of it, recording vacancies in the 20-percent range, quarter after quarter. But the retail sector’s performance is an entirely different story. Retail numbers remain in the single digits across the country and for one leading metropolis, the office vacancy rate is a whopping 8 times higher than the retail vacancy rate. To understand if there is any connection between office vacancy and the retail real estate market (and vice versa) we compared the vacancy rates for the two property types in some major U.S. cities.

The U.S. office market is not yet on the road to recovery. The national office vacancy rate rose quarter-over-quarter to 16.4 percent in the second quarter of 2023, marking a record high for the sector, according to Colliers. Most of the top metropolitan areas are still being hobbled by their beleaguered central business districts, where remote work-induced downsizing, flight-to-quality relocations, and even safety issues in some cases, have turned these once bustling downtown areas into veritable ghost towns. 

Los Angeles21.0%5.3%
Miami-Dade County10.4%3.1%
Source: Colliers, Q2 2023

Houston is among those markets where the office sector is struggling the most. The city recorded an office vacancy rate of 22.1 percent in the second quarter, one of the highest vacancy rates in the country, due in no small part to undesirable Class B properties in the CBD. Houston’s retail sector, on the other hand, is a study in contrast, with a vacancy rate of 4.9 percent, just a bit above the national average retail vacancy rate of 4.2 percent. Ongoing population growth and a solid job market combined with delayed construction due to rising costs have created the perfect storm for success in the retail market. Demand is growing and retailers are competing for a limited pool of premier space in coveted locations across the Houston area.   

In metropolitan Los Angeles, the vanishing of names on Downtown tenant rosters, especially those at the larger high-rises, persists, contributing to the metropolis’s 21 percent vacancy rate. Adding to the market’s troubles, albeit temporarily, are a number of vacant office buildings in the Hollywood and Mid-Wilshire areas that have been tapped for redevelopment into multifamily destinations. On the retail side, while Los Angeles maintains its status as one of the leading shopping destinations in the world, its retail sector vacancy rate of 5.3 percent is more than a full percentage point above the national average. It’s not the office market that has the number on the rise, it is the substantial development activity that’s to blame for the above-average retail vacancies.

Chicago’s office market is suffering the same ills as others with remote work taking much of the blame for the high vacancy rate of 20.5 percent. The Chicago retail sector’s vacancy rate is above the national average as well, but it’s all relative in this case as the figure is low for Chicago. Lee & Associates notes in its second quarter report that Chicago’s retail market is amidst one of its strongest demand formation environments recorded in more than two decades.

The connection between office and retail vacancy rates seem to be a mixed bag. High office vacancies do not necessarily translate into notably above-average retail vacancies as evidenced in Houston. There are, however, some startling contrasts. Boston’s office vacancy rate is high at 19.7 percent—eight times that of the area’s retail vacancy rate, which is enviably low at a mere 2.6 percent. The sizeable influx of new residents over the last few years and modest development activity has retailers clamoring for space in the suburban and urban areas of this highly constrained market. Retail demand is outpacing supply in metropolitan Boston.

Of the country’s leading markets, Miami-Dade County is among the few that are experiencing both low office vacancies and low retail vacancies, at 10.4 percent and 3.1 percent, respectively. Colliers notes that on the office side, the happy equilibrium is due in large part to numerous office users opting to market excess square footage instead of vacating the entire space in favor of smaller accommodations. As for the retail sector in the area, population growth, vibrant tourism, and strong tenant demand continue to keep occupancies on an upward trajectory.

There are many factors impacting the office and retail sectors, but no two metropolitan areas are alike. There is no common thread when comparing vacancies for the two property types. Although, looking at the majority of top markets in the most general of terms, the office sector is plagued by high vacancy rates and the retail sector is coasting along with average occupancies in the mid-90-percent range. It seems even the less-than-stellar office sector can’t keep retail down. 

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