US Office Vacancies Soar: Insights from Crown Castle (NYSE:CCI) and Boston Props (NYSE:BXP)

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By Ronald Tech

The American corporate landscape is facing a dire dilemma as empty office spaces across the United States hit their highest vacancy rates since 1979, according to a report published by Moody’s Analytics. The grim data indicates that almost 20% of office space in major U.S. cities remained unoccupied by the fourth quarter of 2023, marking a substantial increase from the 18.8% vacancy rate recorded a year earlier.

The surge in vacant office spaces can be attributed to various factors, including the proliferation of remote and hybrid work setups – a trend that gained momentum during the global COVID-19 pandemic. However, Moody’s also pointed to excessive construction during the 1970s and 80s as a contributing factor to the current predicament.

Texas Office Space Massacre

The Lone Star State finds itself bearing the brunt of the office space crisis, with Houston, Dallas, and Austin ranking as the top three cities with the highest vacancy rates. This slump has reverberated in the stock prices of Texas-based commercial real estate investment trusts, with companies like Crown Castle Inc CCI taking a 15.5% nosedive in 2023.

Conversely, Boston Properties, Inc BXP, operating in a region with lower office space vacancies, witnessed a 5.3% surge in 2023.

The majority of the unoccupied space can be found in older buildings, particularly those constructed in the era preceding the adoption of open-plan office design. Thomas LaSalvia, head of commercial real estate economics at Moody’s Analytics, highlighted the shift from the traditional, compartmentalized office layout to the contemporary open-plan model, stating, “You had a shift away from the ‘Mad Men,’ Don Draper era of some of these large, large offices.”

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Global Glimpse: China Context

While the United States grapples with its real estate turmoil, China paints a picture of even starker distress. The imminent collapse of Evergrande, once considered the world’s most valuable real estate company by market capitalization, has cast a dark shadow over China’s property market.

A comparative outlook reveals that the Vanguard Real Estate Index Fund ETF VNQ, tracking a portfolio of U.S.-based real estate investment trusts, soared by 6.2% in 2023. In stark contrast, the Vanguard Global ex-U.S. Real Estate Index Fund ETF VNQI, predominantly consisting of Asian property firms, saw a meager 1.2% increase over the same period.