Moody’s Investors Service has joined the growing chorus of voices raising concern about a possible glut of new office space that could hurt some market participants.
In a new report, Moody’s notes that new office construction increased markedly about three years ago, averaging around a 1% increase in inventory per year. And through 2018, the credit rating agency expects the annual growth rate of U.S. office space to roughly double that of the past three years.
At the same time, Moody’s expects the growth in demand for office space to weaken. In 2018, the annual growth rate of office-using employment will be about half of what it was this year, Moody’s predicts.
The upshot: higher office vacancy. “As supply exceeds demand, the overall office vacancy rate will likely climb more than 1.5 percentage points over the next three years from the current cyclical low of about 13%,” the report stated.
Of course, higher vacancy can be good news for tenants looking for space or renewing leases. It often means lower rents and increased landlord concessions like interior work and months of free occupancy.
But Moody’s tends to look at commercial real estate through the lens of creditors, particularly investors who purchase commercial mortgages that are packaged into rated debt securities. Like other rating agencies, Moody’s analyzes these securities to assess their chances of defaulting, a risk that increases as vacancy rises in the property backing the mortgages.