US commercial-property crisis deepens with office vacancy rate topping 2008 highs to hit a new record

• The stress in the US commercial real-estate industry is mounting with office vacancy rates surpassing 2008 highs.
• "Vacancy has inched above the prior peak of 16.3%, seen at the height of the Global Financial Crisis, with further upward pressure expected to follow," real-estate services firm Colliers said.

The stress in the US commercial-property sector is mounting, with office vacancy rates surpassing highs seen at the peak of the 2008 global financial crisis.

A measure of unoccupied commercial workspaces in America climbed to a new record of 16.4% in the second quarter, indicating a continued weakening of business conditions, according to a report by real-estate services and investment management firm Colliers.

"The softening in key U.S. office market fundamentals, seen in the prior two quarters, continued in the second quarter of 2023. As a result, net absorption remained negative, while vacancy and sublease space hit new record highs," Stephen Newbold, national director of office research at the company, wrote in the report.

Since the start of the year, the commercial real-estate (CRE) market has been grappling with multiple challenges including the impact of high interest rates, work-from-home trends, and a credit squeeze that followed the banking turmoil of the first half.

"The U.S. office vacancy rate stands at 16.4%, up 30 basis points from the first quarter. Meanwhile, the total availability rate stands at 20.2% and has increased by 130 basis points year-over-year. Vacancy in this cycle has now exceeded the prior record peak of 16.3%, seen at the height of the Global Financial Crisis," Newbold wrote, adding that further upward pressure was expected on vacancy rates.

Regions facing the highest vacancy rates include Houston, Indianapolis, and Greater Los Angeles, per Colliers.

A sharp rise in interest rates over the past six quarters have compounded the problems faced by the CRE sector. The Federal Reserve raised benchmark rates by more than 500 basis points since early 2022 to tame inflation - the steepest increase since the 1980s.

While most office property owners were able to access cheap credit over the past decade by taking take advantage of low borrowing costs, the recent surge in rates has made it harder to refinance such debt.

Amid the dimming outlook for the sector, one Columbia economist has predicted that some of America's biggest cities could be on the edge of an economic "doom loop" due to the collapsing office market.

Hedge fund founder Kyle Bass also made bearish calls relating to the office sector, stressing that US banks could lose up to $250 billion on their exposure to commercial properties.