The beginnings of a multi-decade transformation? That’s what Yardi Matrix predicts for the office sector
Posted By: REjournal on January 30, 2025. For more information, please click here to read the source article.
Another unsteady year for the U.S. office sector? That’s what Yardi Matrix predicts in its January National Office Report.
In this report, Yardi Matrix says that 2025 will be another tough year for the U.S. office market. Even more worrying? The company says that the worst days of the country’s office sector “may not yet be in the rearview mirror.”
As Yardi Matrix says, the U.S. office sector is in the early days of what it calls a multi-decade transformation of this troubled sector.
The numbers bear out Yardi Matrix’s gloomy outlook. According to the company’s January report, the U.S. office sector ended the year with a national vacancy rate of 19.8%, an increase of 150 basis points from a year earlier.
Yardi Matrix is not predicting that office vacancy rates will fall this year, even as major corporations demand that their employees return to the office. As Yardi Matrix says, office utilization rates have plateaued in the last two years, indicating that many companies have permanently adopted remote and hybrid work.
As Yardi Matrix says, when a major company like AT&T states that all employees must return to the office five days a week, it generates headlines. But the many smaller companies that commit to hybrid work and downsize their office space? That rarely makes the news today.
Because of this, Yardi Matrix predicts that any drop in the U.S. office vacancy rate in the next few years will be driven by a shrinking stock of office space, not a rise in occupied space.
In another prediction, Yardi Matrix says that it expects office conversions to happen in 2025, but not in huge numbers. Most obsolete office properties won’t work for conversions to multifamily, industrial or retail uses. Conversion is expensive, and it only works for properties in the right locations.
In slightly more positive news, Yardi Matrix predicts that there will be an increase in office sales volume this year. But the company also says that the average price of an office building will not increase much in 2025.
As Yardi Matrix says, because office utilization rates have plateaued and hybrid work is now the norm for many firms, investor demand for office space will remain muted in 2025. So while office sales volume should rise this year, don’t expect a boom in investor dollars flowing to this troubled commercial sector.
In its report, Yardi Matrix said that a significant portion of 2025’s office transactions will be distressed sales. That’s because billions of dollars in loans are maturing this year, with many of them for office buildings that have struggled to maintain occupancy.
Several markets in the Midwest and Texas saw office vacancy rates rise in 2024. In Dallas, for instance, the metropolitan area ended 2024 with an office vacancy rate of 24%, up 380 basis points from the end of 2023. And in Austin, the office vacancy rate stood at 27.9% as of the end of 2024, up 690 basis points from a year earlier.
Nashville saw its office vacancy rate increase by 90 basis points throughout 2024, while in Chicago the office vacancy rate jumped by 70 basis points by the end of 2024 compared to the end of 2023.
There were bright spots in both Texas and the Midwest, though. In Houston, the office vacancy rate fell 40 basis points in 2024, ending the year at 24.5%. And in the Minneapolis-St. Paul market, this vacancy rate dropped by 160 basis points, ending 2024 at a fairly low 16.2%.
Detroit also saw its office vacancy rate fall during 2024, by 30 basis points, ending the year at 24.7%.
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