SACHA PFEIFFER, HOST:
I live in the Boston area. And when I walk and drive around, I see a lot of signs on buildings advertising office space for rent. When I travel to Washington, D.C., to host this show, I see the same thing - ditto during recent work trips to New York and St. Louis and Louisville and Raleigh-Durham.
Vacant commercial space is everywhere, and a recent study from the real estate firm Cushman & Wakefield quantifies just how many buildings nationwide are mostly or partially empty. Overall, about a fifth of U.S. office space was vacant as of the end of last year. David Smith is the author of that report and is with us to talk about these high rates and why they matter. Welcome, David.
DAVID SMITH: Thanks for having me.
PFEIFFER: David, as I look at this list in your report - I mean, Tampa and Austin and Cincinnati, about 22% vacancy rate; Dallas and Atlanta, 21%. Why is the vacancy rate so high in some of these cities? I'll add that I assume it has a lot to do with work from home, but is it just that? Is it more than that?
SMITH: I would say it's more than that. It's really four factors over the last few years that have impacted office occupancy. So one is we've had a lot of economic uncertainty going back to 2020 and early 2021 and then, again, certainly over the last year as interest rates have risen.
The second reason, as you noted, is that we've seen increased amounts of remote work and hybrid work, and that's shifting how occupiers are thinking about their footprints.
Third is we've seen a lot of new construction come online. Those spaces do get leased up, but people move out of other spaces that end up being vacant.
And then the fourth thing I would say is that there is - been an increase in subleased space, especially over the last couple of years, as occupiers have looked to shed some of their footprint. We've seen them putting space available on the sublease, so that pushes up the vacancy rate as well.
PFEIFFER: You know, in terms of the problem of having all this empty office space, one is that cities and towns that rely on commercial tax revenue suddenly are getting less revenue - also less traffic for local restaurants. Any other consequences or concerns of all this empty space?
SMITH: No. I mean, I think you mentioned that there are some challenges when there's more empty space. You know, we are, you know, optimistic that those vacancy rates are about to peak. And we'll start to see them come down, and you'll start to see some of those things reverse where you will have more larger tech space and you will have more people on the streets.
PFEIFFER: But why would it reverse? Because there seems to be little sign that the work-from-home trend is changing, and I recently read an opinion piece in The New York Times headlined, "Commercial Real Estate Is In Trouble." It makes the argument that vacancy rates may get worse as leases expire and many companies choose not to renew them. So why are you optimistic?
SMITH: Two reasons - one is we expect to see job growth accelerate when we head into 2025 and beyond and that office-using industries in particular will take up a disproportionate share of new jobs that are created. And two, we're tracking several hundred different companies and their policies around in-office work. And all of them, if they've changed their policies over the last couple of years, are actually moving towards having people in more. So we're probably past a lot of the cutting of footprints, even as occupiers kind of figure out how they move forward with their employees.
PFEIFFER: You know, I hear a lot of people concerned about all this empty space, but you seem fairly nonchalant about it. And I'm trying to decide if you're right or if, because you work for a real estate firm, you have to be - sound optimistic.
SMITH: I'm not nonchalant. I wouldn't say that. I think there are real challenges for individual buildings, and investors need to be cautious. I think the long-term trajectory is that office is a central part of the economy. And I think, 15 years ago, we were over-retailed as an economy. And if you look at the metrics for high-quality malls, high street, even grocery-anchored retail centers, those are doing really, really well. And I think this is an opportunity for the office market as well to redevelop itself. And actually, in 10 or 15 years, we'll look back, and the office market will have revolutionized itself in a really exciting way.
PFEIFFER: I hope you're right. That's David Smith with Cushman & Wakefield, the real estate firm. Thank you.
SMITH: Thank you. Transcript provided by NPR, Copyright NPR.
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