Capital Economics predicts an extra 25% decline in office values ​​within the “hardest-hit metros” reminiscent of San Francisco

“We expect values ​​in Seattle and San Francisco to decline at least another 25% from the end of 2023,” said Kiran Raichura, deputy chief real estate economist on the research firm. wrote On Monday.

Office job growth was weak in several sectors last yr, however the “big loser” was the data industry, where office jobs actually declined. Los Angeles, San Jose and San Francisco saw a number of the biggest declines in office jobs last yr — and if that is not clear, that is not good for office buildings.

Capital Economics expects that pain to proceed this yr within the three markets mentioned above, but expects New York City to see the weakest office job growth over the following five years. Austin, alternatively, will take the lead. The real difference between the 2? Affordability.

That does not imply that other aspects don’t play a task; Austin, for instance, has its own weaknesses. But typically, southern metro areas like Austin, Dallas and Houston use offices far more than large northern markets (and other tech-based markets where usage is lowest). Office usage in these southern markets is sort of two-thirds of pre-pandemic levels, in accordance with Capital Economics.

“Of our forecast markets, San Francisco and Seattle have the highest sublease availability, which we expect will transition to negative absorption over the next few years,” Raichura wrote. Basically, the 2 markets have the biggest physical rental space available, but when demand is lower than supply, emptiness increases and absorption becomes negative – all negative for capital value.

In the primary quarter of this yr, office vacancies reached a brand new all-time high of 19.8% – surpassing rates from previous recession periods in 1986 and 1991. Since the beginning of the pandemic, emptiness rates have risen much more sharply in Austin and San Francisco, exceeding 10%, nonetheless for very different reasons. In Austin, the quantity increased as a consequence of a rise in inventory; In San Francisco, vacancies rose as utilization of obtainable space declined.

“Looking forward, we expect the largest increase in vacancy to occur in Seattle, which is expected to experience the second-largest decline in occupied space and the second-fastest inventory growth,” Raichura wrote. “San Francisco and Austin are likely to be close behind.” But Capital Economics predicts that vacancies in Austin will peak in 2026 and that Austin “will experience a decent recovery along with other southern metros” after that.

According to Capital Economics, rents have been surprisingly stable – aside from San Francisco. Still, the research firm expects rents to fall in New York City, San Diego, San Jose, Seattle and San Francisco, not less than through the tip of 2025 for the latter three cities. However, southern markets will prepared the ground in rents.

Still, “all office markets still look overvalued,” Raichura wrote. His team expects yield increases to be strongest in Seattle and San Francisco, suggesting higher risk: As capitalization rates rise, property values ​​fall. So yield increases and falling rents are why Capital Economics is forecasting that San Francisco and Seattle will see the most important declines in office values ​​between this yr and the tip of next yr.

“Comparing the previous declines with our forecasts shows that the decline in capital value from peak to trough from the end of 2019 will reach almost 60% in the most affected metropolitan areas,” he wrote. In Dallas and another markets it’ll be half that. Still, capital value declines might be “far greater than in the post-GFC period,” Raichura added, referring to the Great Financial Crisis.

Last yr, Raichura and Capital Economics predicted that San Francisco’s office sector could be on the epicenter of the crash. It seems that nothing has modified.