Occupancy rates at foreclosed U.S. office buildings have fallen far faster since the pandemic's outbreak in the first quarter of 2020 as demand sank for space.
Prior to the pandemic, occupancy at foreclosed properties had begun a gradual decline through 2019, averaging a drop of about 0.6% per quarter, according to CoStar data. Since the first quarter of 2020, though, occupancy has been falling at a rate of about 2.5% per quarter on average. Occupancy is down 40.7% from a peak of 88.4% in the second quarter of 2015. It's now at 57.5%.
A total of 117 office foreclosures have hit the market as of November, involving 134 buildings with a value of $2.7 billion, CoStar data shows.
“Once an office property’s occupancy falls near 70%, it’s very difficult to operate it competitively and still meet your debt service obligations,” said Chad Littell, national director of capital markets analytics for CoStar. “A greater and greater portion of your cash flow goes to meeting debt service, which leaves less cash for repairs and maintenance, common-area upgrades, tenant improvements, or leasing commissions.”
Foreclosed properties fell below that 70% threshold in the fourth quarter of 2020.
While occupancy has been falling, rent growth was flat through most of 2020 through 2022, turning negative in 2023.