US Office Market Set for 20% Decline, Long Road to Recovery Ahead

America’s office market is currently navigating a substantial correction, projected to undergo a further 20% price drop, as forecasted by Capital Economics. The research firm highlighted persistent weak growth and an impending decrease in interest rates as factors contributing to the ongoing challenges faced by real estate values. In a recent note, they emphasized the significant value adjustment looming for offices, foreseeing another sizable decline on the horizon.

The commercial real estate sector, particularly the office market, has grappled with a tumultuous outlook for several months. The surge in popularity of work-from-home and hybrid work models has propelled office vacancies to an all-time high this year. Despite a slowdown in new supply, a decline in demand remains the primary driver behind escalating vacancy rates, a trend that Capital Economics predicts will persist for the next few years.

The dwindling demand is compounded by the sustained increase in interest rates, which impacts the return on income derived from office properties. While investors anticipate a potential interest rate cut by the Fed in the coming year, concerns remain about the potential longevity of elevated rates as central bankers closely monitor inflationary trends.

Capital Economics estimates a cumulative decline of 43% in US office values from peak to trough, anticipating a prolonged recovery period that might extend over two decades before values rebound to their early-2020 levels.

Warnings about challenges within the commercial real estate sector have been sounded since the banking turmoil in early 2023, triggering tighter credit conditions. This constrained access to financing for office buildings, with reports indicating that some lenders have sought to offload their commercial real estate assets from portfolios this year, as reported by Bloomberg.

Concurrently, property owners securing mortgage refinancing are encountering significantly higher interest rates. This situation has raised concerns among some economists about an imminent surge in distressed debt, particularly with approximately $1.5 trillion of commercial real estate debt maturing over the next few years.