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Record High Office Vacancies on the Horizon

A new report shows that we should expect 243 million square feet of U.S. office space to hit the market soon. A slew of U.S. office leases are set to expire thanks to the fact that many office tenants whose leases were set to end during the worst of the pandemic signed one-year or two-year renewals as they tried to figure out how much less space they would need under a hybrid strategy.

These expiring leases account for around 11 percent of all leased office space in the United States, according to data from JLL. If these spaces are not renewed or released it could result in a disastrous domino-effect of lost revenue and lower property values. Many expect a dip in office space demand, 15 percent by some estimates, can be attributed to the post-pandemic reality of a remote or partially remote workforce.

Loans to office building owners who are in default are also on the rise. According to a Barclays analysis, 21.2 percent of office loans packaged into commercial mortgage securities during the global financial crisis were either handled by special servicers or on watch lists in February, two closely watched categories that could lead to defaults. Since 2010, this is the highest level.

It’s the perfect storm of rising interest rates, lowered occupancy with remote or a partially remote workforce, and loans coming due that’s resulting in giving office landlords and economists grief. But despite the looming gap of office leasing ahead, big tech companies (like Meta, Google, and Microsoft) have been expanding their office footprint. That said, most office tenants aren’t expected to increase their leasing activity any time soon, so we will have to wait and see just how much of an economic threat this will be.

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