U.S. Office Market Predicted to Fall by another 20% in 2024
"Persistent weak growth and elevated (albeit soon-to-be falling) interest rates continue to spell trouble for real estate values," said Capital Economics, an independent economic research firm, in an analysis.
"Offices still face a substantial value adjustment, with another 20 percent fall to come in our view. What's more, we still think it is likely to take two decades or more before office values regain their peak of Q1 2020," it said.
The new analysis is in line with the firm's projection in June that office values in the United States, driven by the rise in remote work, would drop 35 percent by the end of 2025 and was unlikely to recover before 2040.
The outlook for the U.S. commercial real estate sector has been troubled for months. Capital Economics predicted that all-property capital values in the country would fall by 10 percent in 2024, after a drop of 11 percent in 2023.
The sector has been hit particularly hard, as work-from-home and hybrid models are still popular among U.S. workers, sending office vacancies to an all-time high this year.
The vacancy rate hit a record high of 13.1 percent in the second quarter this year, compared to the quarterly rate of 9.5 percent in the two years before the pandemic, according to the National Association of Realtors (NAR).
Metropolitan areas that are tech hubs led the rise in office vacancies, such as San Francisco with a quarterly vacancy rate of 18.9 percent, according to the NAR.
The trend of collapsing values is particularly pronounced in California's office market, due to reducing demand.
Compared to last year, the volume of office sales in Los Angeles County, the most populous county of the country, fell 51 percent, according to recent market reports.
Dwindling demand is being complicated by higher interest rates, which affect the return on income from offices.
"With high levels of inflation, interest rates at multi-decade highs, and rising geopolitical issues, the global investment environment continues to face headwinds," said William McMorrow, chairman and CEO of Kennedy Wilson, in the firm's quarterly earnings report.
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