January 8, 2023

Possible Recession Dampens Outlook for Office Sector

January 6, 2023 | S&P Capital IQ

Office real estate investment trusts posted an 8.8% annual gain in net operating income to $2.68 billion in the third quarter of 2022, reflecting performance resiliency amid soaring inflation, Nareit said in its “Total REIT Industry Tracker Series” report.

Nareit is the U.S.-based trade association for REITs and publicly traded real estate companies.

Employers paid rents even while many employees abandoned working from offices, Nareit said.

Funds from operations exceeded pre-pandemic levels by 11.7% during the third quarter of 2022. Quarterly FFO declined just 1.9% on average from 2019 to 2020, Nareit said. Employment in the office sector, which indicates office demand, was also up. The outlook for the sector is gloomy, however, as economic indicators point to a likely recession in 2023.

The office vacancy rate rose to 12.3% at the end of September 2022 from 9.2% at the end 2019, The Wall Street Journal reported, citing CoStar Group Inc. data. The amount of space available for sublease stands at roughly 211.8 million square feet, up from 108.8 million square feet in 2019. Additionally, new business searches for new office space fell in 2022 to 44% compared to figures in 2018 and 2019, the Journal reported, citing VTS, which tracks tenant demand.

If these conditions continue, building owners may find it challenging to pay mortgages, which could then impact the financial system. Office buildings back roughly $1.2 trillion of debt as of the end of the second quarter of 2022, the Journal reported, citing data from Trepp Inc.