The Covered California office in North Fresno has been mostly vacant since its opening in 2020, the most drastic local example of the impacts of remote work. Photo contributed

Nearly $150 billion of office loans are maturing by the end of 2024, and more than $300 billion will mature by the end of 2026. Sadly, much of this office space sits empty.

Cities in Texas are among the country’s leaders in office real estate vacancies, whereas vacancies in New York City, San Francisco, and other coastal cities have stabilized.

Commercial office real estate construction continues to grow, adding to the glut of space in major American cities, especially in Texas.

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Related story: Most dire commercial real estate forecasts miss the mark in Fresno

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According to Commercial Edge, a commercial real estate software firm, about 17.8% of office space was vacant. Three of the top 10 cities with the highest vacancy rates are in Texas.

Even though the COVID-19 pandemic reduced tenant demand and changed how people work, developers continue to build more office space. According to the Dallas Federal Reserve, in the middle of summer 2023, roughly 115.8 million square feet were under construction, or 1.7% of all space. But in many cities, the percentage was much higher. For instance, Austin has about four times the national average of new office space under development, suggesting the problem may get worse.

High vacancy rates have caused financial difficulties for many commercial landlords, and Office Real Estate Investment Trusts (REITs), which affects investors.

Office vacancies have soared
Much of the office vacancy news is usually about New York City and other coastal cities, which struggled during the pandemic. For example, as of October 2023, Manhattan’s office vacancy rate was 17.4%, high by historical standards. It was at most ~11%, even during the Great Recession. However, this value is below the national average of 17.8%, implying NYC is now doing slightly better than other metropolitan areas.

Other coastal cities exhibit similarly high values. San Francisco’s current rate is 22.6%, the Bay Area is at 18.9%, Seattle is at 21.8%, and San Diego is at 18.2%. About one-quarter of Houston’s office space is vacant, which is the second worst rate after Detroit. Moreover, this spans 12 months, meaning tenants are reducing their footprint while developers are completing new buildings. The other Texas cities with a high vacancy rate are Austin, with a rate of 20.5%, and Dallas at 19.5%, with both cities trending higher.

The pandemic changed how people work
The COVID-19 pandemic changed how people work. Although hybrid work was growing in popularity, it was limited to certain professions.

However, the pandemic caused structural shifts, resulting in many employees working mostly at home. Technologies like Zoom revolutionized how some jobs are performed by connecting people in different locations.

They allowed tasks like video conferences, presentations, and chat rooms to become routine.

Consequently, educators could teach dozens of students from their homes.

Also, patients could meet nurses and doctors through telehealth consultations. Certified financial advisors could meet clients and discuss retirement planning.

Today, most businesses use Zoom or similar platforms as a regular part of their work. Although employers want more workers to return to the office, they understand hybrid work is here to stay, and employees view it as a quality of life issue.

Texas developers keep building
Commercial real estate developers continue to develop more properties despite the changing expectations about how people work. In fact, millions of square feet are being built in major metropolitan areas. Boston is the leader, with nearly 14 million square feet under construction. Seattle, San Francisco, and New York City also have millions of square feet of new commercial real estate.

However, on average, Texas cities have the largest percentage of new office space. Austin has almost 6 million square feet being developed. That’s less than Boston, but the quantity equals about 7% of existing office space that must eventually be leased.

Similar scenarios are in play for Houston and Dallas. Because the population of Texas is growing quickly, Houston and Dallas are adding 2.7 million and 3 million square feet, respectively.

Immigration from Asia, Latin America, and other states and an influx of jobs has resulted in booming cities. However, this fact, inexpensive land, less regulation, and expectations of continued future growth have caused overbuilding.

Commercial office REITs are struggling
The effect of office vacancies on their owners has been significant. Many of these firms are privately held, publicly traded commercial office REITs.

Collectively, they own tens to hundreds of millions of square feet across the country. Hybrid work has caused lower demand, leading to high vacancy rates. Additionally, rental rates are now declining. Because of these challenging business conditions, net income is falling.

These firms also typically use debt to finance growth. But now interest rates and expenses have risen, adding to their woes, and office real estate delinquencies are reportedly rising. Their lower income and earnings also mean they have less money to pay investors, leading to dividend cuts or suspensions. For example, a large Austin office REIT, Brandywine Realty Trust (BDN), lowered its dividend by nearly 20% as occupancy fell.

The bottom line about commercial real estate problems
Landlords may want a reversal in trends. But as John Dealbreuin, a personal finance expert with Financial Freedom Countdown, points out, “many people prefer the flexibility of hybrid work instead of going to the office, and it avoids the stress and time wasted in commuting to work.”

According to research from Stanford University, working from home accounted for only 5% of working days in 2019 but has settled at 25% in 2023 because of the pandemic. This will likely continue in the foreseeable future because workers desire flexibility and a higher quality of life.

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This article was produced by Media Decision and syndicated by Wealth of Geeks.