\n
![](\"https:\/\/fortune.com\/img-assets\/wp-content\/uploads\/2024\/04\/GettyImages-1272467757-e1712684323931.jpg?w=2048\")
<\/p>\n [ad_1]
\n<\/p>\n
Things may have quieted down in the commercial real-estate world, but offices<\/a> are not in the clear. After all, interest rates are still high and remote work has mostly prevailed. And for those areas Capital Economics calls \u201cexpensive west coast markets\u201d that happen to be the \u201cworst-hit,\u201d it\u2019ll only get bloodier.\u00a0<\/p>\n \u201c\u200b\u200bWe think values in Seattle and San Francisco are both set to fall by another 25% at least from end-2023 levels,\u201d Kiran Raichura, the research firm\u2019s deputy chief property economist, wrote<\/a> on Monday.\u00a0<\/p>\n Office-based job growth was weak in several sectors last year, but the \u201cbig loser\u201d was the information industry, where office-based jobs actually contracted. Los Angeles, San Jose, and San Francisco saw some of the greatest falls in office jobs last year\u2014and if it isn\u2019t clear, that\u2019s not good for office buildings.\u00a0<\/p>\n Capital Economics sees that pain pushing through this year in the three aforementioned markets, but over the next five years, it expects New York City to experience the weakest office job growth. Austin, on the other hand, will lead the way. The real difference between the two? Affordability.<\/p>\n That isn\u2019t to say there aren\u2019t other factors at play; Austin, for instance, has its own set of weaknesses. But generally, southern metropolitan areas such as Austin, Dallas, and Houston are utilizing offices much more than major northern markets (and other tech-based markets, where use is the lowest). In those southern markets, office use is close to two-thirds of pre-pandemic levels, according to Capital Economics.\u00a0<\/p>\n \u201cOf the markets we forecast, San Francisco and Seattle have the highest sublease availability which we expect to pass through into negative absorption over the next few years,\u201d Raichura wrote. Basically, the two markets have the most available physical space to rent, but when demand is lower than supply, vacancy increases and absorption turns negative\u2014all bad for capital values.\u00a0<\/p>\n In the first quarter of this year, office vacancies<\/a> set a new all-time high at a rate of 19.8%\u2014and blew past prior recession-era rates in 1986 and 1991. Since the start of the pandemic, vacancy rates have risen by more than 10% in Austin and San Francisco, but for very different reasons. In Austin, it\u2019s risen because of an increase in inventory; in San Francisco, vacancies rose because occupancy of available space has fallen.\u00a0<\/p>\n \u201cLooking ahead, we expect the biggest rise in vacancy to come in Seattle, which is set for the second-largest fall in occupied space and the second-fastest inventory growth,\u201d Raichura wrote. \u201cSan Francisco and Austin are likely to be close behind.\u201d But Capital Economics predicts vacancies in Austin will peak in 2026, and after that, it \u201cwill join the other southern metros in enjoying a decent recovery.\u201d<\/p>\n Rents have been surprisingly resilient, Capital Economics said\u2014apart from San Francisco, that is. Still, the research firm sees rents falling in New York City, San Diego, San Jose, Seattle, and San Francisco, up until at least the end of 2025 for the latter three cities. Southern markets will lead the way in rents, though.<\/p>\n Nevertheless, \u201call office markets still look overvalued,\u201d Raichura wrote. His team expects yield rises to be the most pronounced in Seattle and San Francisco, which signals greater risk: When capitalization rates rise, property values fall. So yield rises and falling rents are behind Capital Economics\u2019 call that San Francisco and Seattle will see the greatest falls in office values between this year and the end of next year.\u00a0<\/p>\n \u201cCombing falls to-date with our forecasts shows peak-to-trough capital value falls from the end of 2019 will reach close to 60% in the worst-hit metros,\u201d he wrote. In Dallas, and a couple other markets, it\u2019ll be half that. Still, capital value falls will be \u201cfar larger than those seen in the post-GFC period,\u201d Raichura added, referring to the Great Financial Crisis.<\/p>\n Last year, Raichura and Capital Economics predicted<\/a> San Francisco\u2019s office sector would be at the epicenter of the crash. It doesn\u2019t seem that\u2019s changed.\u00a0<\/p>\n<\/div>\n\nSubscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up<\/a> for free.<\/div>\n