Tech Layoffs, Remote Work Push Office Vacancies To 19.6%, Highest Since 1979

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Zinger Key Points
  • With the Federal funds rate at 5.25%-5.50%, the real estate sector has yet to recover from the effects of expensive borrowing.
  • A reduced need for office space, fueled by tech layoffs and changes in work dynamics, are keeping vacancy at record highs.

The commercial real estate industry continues to reel from the impacts of remote work and escalating inflation.

Elevated interest rates and a widespread trend toward reducing office space across various industries have left the sector facing unprecedented amounts of vacant office space.

On an earnings call on Monday, Goldman Sachs Group Inc GS CEO David M. Solomon mentioned the poor state of commercial real estate as one of the main factors slowing U.S. growth, along with continuing concerns about inflation and escalating geopolitical tensions.

The sector has become especially sensitive to speculation around interest rates. Last month, a hint of rate cuts by the Fed had several stocks and funds jump through the roof in a show of volatility that's unknown to a sector normally praised for offering stability against riskier markets.

Just days later, S&P Global Inc SPGI decided to downgrade five regional banks based on risks associated with the unstable commercial real estate market.

Operational shifts for big tech companies are partly fueling the commercial real estate slump. The change to remote or hybrid work, which has become the new status quo in the tech sector after the strike of COVID-19, has left many companies juggling more office space than they need.

That's added to a massive trend of layoffs which continued to be common practice in the tech sector during the first quarter of 2024, after a slight downtick during the second half of 2023.

Late last month, Amazon.com Inc AMZN said it plans to cut $1.3 billion by reducing office space and ending leases early. The tech behemoth faces a 33.8% vacancy rate in its offices after laying off over 27,000 employees in 2022 and 2023.

According to a Wall Street Journal report, Alphabet Inc Class C GOOG GOOGL is subleasing some of its Silicon Valley office space, while Meta Platforms Inc META has reduced leases for its own office space. The Facebook owner has been slashing office space all around the globe this year, including in locations like Singapore and London. Meanwhile, Salesforce Inc's CRM SEC filings show that the company is using half the office space it was using one year ago in the San Francisco area.

Read also: Powell Delays Fed Rate Cuts—’We Need Greater Confidence In Inflation’; 2-Year Yields Spike To 5%

The pullback from tech is proving especially painful for the real estate sector when it adds losses from other common office-dwelling sectors, including law firms and financial companies.

By January, a Moody's Analytics report put the average vacant office space in large cities around the country at 19.6%, the highest it's been since 1979.

Several cities are showcasing extreme levels of office vacancy these days, with San Francisco at a record of 36.7%, compared to just 3.6% before the pandemic. The void is more noticeable in cities associated with the tech industry, including Seattle, New York and Austin. In Seattle, office property transactions declined in 2023 a staggering 98.7% year-over-year after almost 45,000 employees were laid off in the area.

On Wells Fargo & Co‘s WFC Q1 call last week, CEO Charles W. Scharf said that commercial real estate revenue was down 7% from the previous year, impacted by lower loan demand in that sector.

Yet the executive added that the sector, which is primarily made up of office space, didn't experience significant changes when compared to the last quarter of 2023.

Vanguard Real Estate Index Fund ETF VNQ, by far the largest real estate ETF by assets under management, is down almost 11% since January, with a 5% drop in the last five days.

Schwab US REIT ETF SCHH and Real Estate Select Sector SPDR Fund XLRE present very similar trajectories.

However, it's not all bad news for investors in the space. Blackstone Inc BX President Jon Gray recently said this could be the right time to "buy the dip" on the real estate plunge. The asset manager is optimistic about the long term future of commercial real estate when considering that the Fed will sooner or later have to reduce rates.

Once that happens, the diminished supply of new developments following this slowdown, combined with cheaper cost of borrowing, could kickstart the industry upwards once more.

Now read: Stocks Grapple With Geopolitical Pressures, Gold Eyes $2,400, Bitcoin Falls Below $62,000: What’s Driving Markets Tuesday?

Image generated using artificial intelligence via Midjourney.

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