Office Rents Hold Steady Despite Escalated Vacancy Rates

Ongoing news headlines regularly report on the office market’s “soaring vacancy rates, a record amount of available sublease space, and rising defaults,” seeming to indicate that office rents would sharply lower to aggressively attract tenants and significantly reduce vacancy. However, due to the way the commercial real estate market works, contrary to what seems to be obvious, office space asking rents are holding steady or even climbing. Since most buildings are financed, it is crucial that landlords maintain the appraised values of buildings that serve as the collateral for loans; otherwise, it could “lead to a covenant default on their loans or at minimum would make it harder for them [landlords] to refinance.”  As an alternative, some landlords are offering “expensive interior buildouts, months of free occupancy and other incentives,” to justify the elevated rent levels. It is expected that office rents will eventually lower, “probably after owners and lenders are forced to restructure mortgages or sell distressed properties.” According to real estate platform Costar’s national director of office analytics, “businesses occupy 200 million square feet less than they did before the ‘recession’ of 2020,” representing a significantly higher negative absorption compared to the 50 million square feet total during the [2008] financial crisis; and statistics from data firm Trepp indicate that “the office delinquency rate on mortgages that have been converted into securities has soared to 6.63%, more than triple the 1.87% rate in January 2020.