US OFFICE vacancies hit a fresh peak in the first quarter as needs continue to evolve with hybrid work setups.

Vacancies rose to a record 19.8 per cent, Moody’s said in a preliminary report on Monday (Apr 1), from 19.6 per cent in the prior quarter. Despite the increase, the credit ratings provider said that the early data points to a stable quarter for commercial real estate.

Tenants continue to downsize with the hybrid work model showing more staying power, battering the office sector. The Federal Reserve’s interest rate hiking cycle has also wounded commercial real estate. The struggles in the sector have already sent vacancy rates past historic peaks in 1986 and 1991 with possibly room for more, according to Moody’s.

“The office stress isn’t quite done yet,” Thomas LaSalvia, Moody’s head of commercial real estate economics and an author of the report, said on Tuesday. But, recent positive economic indicators are helping to prevent a perfect storm in the office sector, he said.

The evolution of offices is similar to what is happened with malls, where some thrive while others fail. Winners and losers will be determined by proximity to mixed-use neighbourhoods and public parks instead of the typical office block, according to LaSalvia.

“There are spots of light and there are spots of extreme darkness,” he said. “This is part of a longer-term evolution where we are seeing obsolete buildings in obsolete neighbourhoods.”

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Other sectors such as multifamily are seeing some positive signals as excess supply is finally being digested after six straight quarters of gains, with a peak at the end of 2023, according to Moody’s.

Moody’s said it is not clear when vacancy rates will peak, as lease rollovers and shifting expectations for Fed monetary policy can cloud projections. BLOOMBERG