articles Ratings /ratings/en/research/articles/220912-property-in-transition-slowing-economies-and-shrinking-demand-pressure-the-credit-outlook-for-office-landlor-12494303 content esgSubNav
In This List

Property In Transition: Slowing Economies And Shrinking Demand Pressure The Credit Outlook For Office Landlords


Trouble Ahead: Higher Interest Expense Strains 'B-' Rated U.S. Health Care Credits


Instant Insights: Key Takeaways From Our Research


U.S. BSL CLO Obligors: Corporate Rating Actions Tracker 2022


How COVID-19 Government Support Might Spark A New Era For Corporate Credit Risk

Property In Transition: Slowing Economies And Shrinking Demand Pressure The Credit Outlook For Office Landlords

For The Global Office Sector, Shrinking Demand Will Pressure The Credit Outlook

A resurgence of COVID cases, along with commuting and safety concerns, have delayed the return to office, and employees are settling into rituals of remote work. Despite increased vaccination rates and a lower death rate from COVID, office utilization remains low globally; it has been somewhat stronger in Tokyo, where office utilization is about 60% of pre-pandemic levels, compared to the U.S., where office utilization was only about 44% for a 10-city average as of July 2022, according to Kastle systems, which tracks keycard access to buildings.

According to CBRE, office vacancy in the U.S. reached 16.9% as of June 30, 2022, the highest it has been since the Great Financial Crisis and one of the highest globally. (For comparison, office vacancy in Tokyo deteriorated to about 6% compared to about 2% pre-pandemic.) While S&P Global Ratings expects an uptick in office utilization after Labor Day in the U.S., overall office occupancy levels will likely remain well below pre-pandemic levels for the next few years, particularly given secular headwinds and slowing economic growth. We expect office landlords to face several years of slow growth, with weaker prospects for leasing and fewer new development projects. While the operating performance for office REITs has been relatively resilient due to the long-term nature of their leases and a stable tenant base, pressure will mount as leases expire. Tenants are reconfiguring the workspace to adapt to the hybrid work model, leading to an overall reduction in footprint in many cases. As a result, landlords will likely need to keep rent concessions high to attract tenants, pressuring profit margins and cash flow.

While leasing activity has recovered materially from 2020 levels, leasing volume remains 15%-20% below pre-pandemic levels in the U.S., and we expect a portion of the upcoming lease maturities to be at risk as tenant demand remains soft. Still, we think the impact of remote working will be gradual given the prohibitive costs to end a lease prematurely. Rather, we would expect tenants to negotiate with landlords or consider moving to higher quality properties with better amenities.

New supply pressure varies by market. In the U.S., net absorption of supply recovered and has remained at positive levels since late 2021, but the recovery is fragile given a high level of completions in key cities like New York City. The amount of sublease space also remains high at about 3.9%, as tenants listed unutilized office space in cost-cutting efforts, though this remains a small share of total availability.

Tenants reconsidering footprint and expansion

Throughout the pandemic, many employers have signaled the provisional nature of their flexibility in terms of remote work, with the degree of return-to-office pressure varying from company to company and industry to industry. Generally, companies in financial services have been more aggressive in mandating a return to the office, while technology companies have been more accommodative of remote work.

We think the days of being in the office full time are largely over and most companies will settle on workers working in the office two to four days a week. This will cause an overall reduction in office space usage that could range from 15%-20% below pre-pandemic levels over the longer term. We already see tenants downsizing footprints modestly and reconfiguring the workspace to provide increased common areas for collaboration and socialization, and less desk space. We also expect more caution with regards to office space expansion given the uncertain pace of workers returning to the office.

Further, we are seeing a slowdown in tech sector hiring that may pose additional headwinds for office demand. The tech sector had been an important office demand driver in recent years, accounting for a higher proportion of office REITs tenant base.

Higher unemployment wouldn't benefit office landlords in the short term

Office real estate demand is cyclical and highly correlated to job creation. Office properties underperformed other traditional real estate property types significantly during the Great Financial Crisis, and also exhibited a somewhat slower recovery. Throughout the pandemic and into 2022, office occupancy has steadily declined. Record inflation and steep rate hikes have put the global economy on a slower growth trajectory. (See "Global Economic Outlook Q3 2022: Rates Shock Puts The Economy On A Slower Path," published June 29, 2022). Global spending and production data have been softening all year, but employment remains strong for now and private-sector balance sheets are in reasonably good shape, particularly in the U.S. and Europe. Still, S&P Global economists expect unemployment to increase to 4.1% in 2023 from 3.4% in the U.S. under our base case.

In a recessionary scenario, which our economist now peg at 45% likely in the U.S. (see "U.S. Recession--Are We There Yet?" published Aug. 2, 2022), unemployment could rise significantly more, dampening office real estate demand. While some market participants think a recession would increase employers' leverage to demand employees to work more days in the office (demonstrating the need for office space), we think this scenario is unlikely to result in higher demand for space for most tenants. Unemployment is a lagging indicator, so we'd expect the impact on the office sector to lag about 12 months from the downturn, pressuring landlords in 2023 and 2024.

Table 1 

Office landlords have limited pricing power

The economic landscape has shifted quickly in recent months and many countries are facing record inflation levels that has prompted aggressive rate hikes by central banks. Real estate generally serves as an inflation hedge, as landlords can typically reset rents higher to offset inflationary pressures. While most leases contain escalators that are fixed or tied to inflation indices, rent growth may lag overall inflation levels in the next one to two years given weakening demand and above-average inflation rates. In this environment, we think office landlords have limited pricing power and tenants hold more leverage. In the U.S., rent growth decelerated meaningfully with annual rent growth at below 2% so far in 2022, though rent growth for class A properties has been stronger relative to class B. We expect most effective net operating income (NOI) growth rates will trend below inflation levels because of accelerating expenses to drive leasing (longer free rent and higher tenant improvement allowances), in addition to higher capital expenditure (capex) spending to retrofit spaces to provide more amenities and higher energy efficiencies.

Flight to quality and stable tenant base mitigates some risks

As tenants plan for a hybrid workspace, they appear willing to pay higher rents for higher quality buildings with better amenities, including open floorplans and more common areas that are more conducive for collaboration and socialization. We expect this flight to quality will widen the bifurcation between class A and class B properties over the next year, and allow owners of class A real estate to gain share and outperform the overall market. In the context of environmental, social, and governance (ESG) policies, green assets are also in strong demand and are now an essential characteristic for many tenants, not just a preferred option anymore. A higher penetration of green assets and offerings of updated amenities could be a differentiator for tenants looking to upgrade office space and increase office utilization.

We believe the REITs that exhibit a healthy tenant base that spans diverse industries, coupled with the long-term nature of leases and well-staggered lease expiration profiles, are better positioned to avoid a material disruption to cash flows caused by the cyclical and secular headwinds.

Access to capital markets could be limited

Rising borrowing costs and market volatility has curtailed capital raising thus far in 2022, and we expect growth through acquisitions and development to slow as capitalization (cap) rates creep upward. Debt issuance has slowed significantly so far this year, while credit spreads have widened significantly. Office cap rates have only increased modestly over the last two years but could climb faster given weaker fundamentals.

A steep climb in interest rates could pressure credit metrics, as office REITs have a higher exposure to variable rate debt than other REITs do. Rising interest rates could add to interest burden and lift the cap rates that are key discount rates to their asset valuations. While rising interest rates are not the only consideration in asset revaluations--and their negative effects may be absorbed by growing rents, benchmark transactions, or tighter risk premiums--we continue think it may put some pressure on future revaluations and REITs' strategic decisions.

A weaker valuation of assets could also put pressure on ratings, particularly for issuers that are more susceptible to valuation shifts as part of our financial risk assessments.

Negative rating bias could increase

Given the weak fundamentals for office demand, we expect growing rating pressure globally over the next year, with greater risk for issuers that are unable to limit the deterioration to credit metrics through asset sales or shifts in capital allocation. Still, the sector remains largely investment-grade and we expect most issuers to maintain current financial policies to preserve target leverage levels and liquidity, as well as to exercise financial flexibility through shifts in capital allocation priorities, as we saw during the pandemic. Rated REITs are also operating with stronger balance sheets than they did during the past downturn, and those with less development exposure and more balanced lease expiration schedules should better withstand likely pressure on operating metrics like occupancy and rental rate growth.

Table 2

Delinquency rates are broadly manageable

In terms of actual U.S./EMEA commercial mortgage-backed securities (CMBS) delinquencies, the impact of the aforementioned office market trends has been muted to date. For example, the 30+ day delinquency rate for office loans backing U.S. CMBS measured just shy of 1.5% as of the end of August 2021, just north of the 1.3% pre-pandemic (February 2020) reading.

That said, during the second quarter of 2022, we took several rating actions within U.S. single-borrower CMBS deals backed by office loans, based on the expectation that overall occupancy and demand levels will decline compared with pre-pandemic levels. Among the dozen or so reviewed transactions (see "U.S. Single-Borrower CMBS Reviews Show Common Themes And Mixed Outcomes," published June 9, 2022), our reviews resulted in mixed rating outcomes, from affirmations (no change) within all rated classes, to downgrades in high investment-grade rated classes. This variance reflected numerous factors, including tenant mix, leverage levels, land value, location, and risks from existing or near-term lease rollovers. Going forward, we believe offices--especially in the class B subsector--will face challenges, and will be examining the potential rating impact on conduit and single borrower CMBS deals.

Within EMEA, if yields go up because interest rates rise, and work from home continues to lead a slowing demand for office space, some property markets and submarkets could be in for the perfect storm, which would lead to a higher default and loss risk for the relevant commercial real estate (CRE) loans. However, most of the office loans backing CMBS transactions that we rate either are in markets that we do not expect to be severely affected by deteriorating rents (such as Frankfurt or Amsterdam) or are generally backed by higher quality Grade A office stock (such as the Central London office properties that back CMBS loans), which we believe is better positioned to remain attractive.

The impact on office-related CMBS issuance has been most acute within U.S. single-borrower deals. After accounting for some 44% of issuance (by balance) in Q2 2021, office loans backed just 12% of Q1 2022 and 1% of Q2 2022 U.S. single borrower transactions. Still, office loans comprised about 40% of Q2 2022 U.S. conduit CMBS collateral, little changed year over year--noting that conduit issuance has been less active than the single borrower side, and that conduit office loans have also started to dry up, contributing to the challenges of aggregating enough collateral for those deals.

Bank exposure is also manageable

U.S. bank exposure to loans collateralized by non-residential CRE properties (including office buildings) where the borrower relies primarily on rental income to repay the loan, totaled roughly $1.1 trillion--about 9% of total loans--in the second quarter of 2022. The portion of past due and non-accrual loans for such "non-owner-occupied" CRE (at least 30 days past due) ticked up modestly since 2020, climbing from roughly 0.8% of loans to a little over 1%, but declined again in Q2 to a 0.8% level with a very low level of write-downs on such loans. For the largest U.S. banks, such CRE loans account for under 10% of loans (with total CRE, including multifamily and construction loans, pushing that ratio somewhat higher) (see "U.S. Financial Institutions CRE Asset Quality Is Resilient: Long-Term Risks Remain," Sept. 7, 2022). As such, even if CRE and office in particular were to undergo additional stress, it is unlikely that such losses would materially hurt their capital positions. However, we also rate several regional banks, where CRE exposures--including on non-owner-occupied properties--are much higher (sometimes over 30% of loans for total CRE). A severe decline in CRE prices and credit quality has the potential to impact these banks more significantly. That said, most rated regional banks manage their exposure by diversifying across several categories of CRE and by geography, as well as by underwriting the loans at relatively conservative loan-to-value ratios, often of 60% or lower. By contrast, the greater proportional exposures to CRE typically reside within the country's smallest regional and community banks, most of which we don't rate. Precise estimates of U.S. bank CRE lending to the office subsector are hard to glean as bank disclosure by property type usually is not granular nor standardized, and thus exposure to office space needs to be estimated or gathered privately. Our best estimate is that office exposure for the median banks is roughly 15%-25% of total non-owner-occupied CRE exposure of $1.1 trillion, meaning it makes up less than 5% of loans in the banking system.

Nonbank lenders are a growing source of capital for commercial real estate and the CRE lenders we rate tend to have significantly higher exposure to office loans, often 20%-40% of their loan portfolios. We expect those lenders--all of which are rated non-investment grade--to face challenges on some of those loans, as leases mature and some tenants reduce the space they rent. However, we have seen some of the CRE lenders reposition their office portfolios since the start of the pandemic by reducing exposure in metropolitan cities and increasing exposure to smaller cities with growing populations, which should alleviate some of the asset quality concerns stemming from office exposure.

Also, the experience and expertise those lenders tend to have in CRE and the diversification and underwriting of their portfolios should allow them to generally work through those challenges, albeit with some loan losses.

Chart 1

The combination of weaker economic activity, higher financing costs and structural changes in office working arrangements suggest the performance of European banks' CRE loans could weaken, particularly those with more stretched affordability or valuations--we note that 13% of CRE loans have loan-to-value ratios of more than 100% at June 2021, according to European Banking Authority (EBA) data. That said, we expect the impact to be manageable for European banks, in part because any deterioration will be from benign levels, and because European banks' overall exposure to commercial real estate remains contained. EBA data show that total CRE exposure for European banks amounted to EUR 1.4 trillion at June 2021--equivalent to about 8% of total loans, of which only a fraction relates to office space. Nordic and German banks continue to be the European players with higher-than-average exposure to CRE

In Latin America, lending and exposure to construction (including CRE) in the Mexican and Brazilian banking systems—the two largest economies in the region—have been limited, representing about 8% and 5% of total loans, respectively. We foresee this conservative approach and modest growth to continue, considering the significant downside risks as partial economic lockdowns continues, coupled with the slow and gradual economic rebound while vaccination programs slowly evolve. We estimate that banks' CRE exposure as a percentage of total loans will stand at less than 5% in both countries. Consequently, we project that banks' balance sheets and capital indicators would be resilient to the ongoing deterioration for this sector over the next 12 months.

Local Government Revenue Bases Are Constrained

Most local and regional governments (LRGs) that operate in large metropolitan areas are relatively resilient to a short-term volatility in the office real estate market. We have reviewed the dependence of LRGs in Greater London, Paris, Frankfurt, Sydney, Tokyo, Hong Kong, Toronto, New York, San Francisco, and Mexico City on various property-related payments made by office landlords and renters. These LRGs predominantly collect taxes and fees depending on the assessed property value. Office-related transaction fees normally represent less than 2% of revenues across the local governments, with the notable exception being in France, where we see some of the most exposed LRGs to real estate market development. Starting last year the départements of greater Paris receive nearly all property-related revenues--in the form of property transaction fees and asset sales--that are directly linked to property market values and demand for new office space. We believe exposure of the city of Paris and département of Haute-de-Seine to such payments is relatively high.

Still, a slow recovery of demand for office space amid the economic weaknesses could materially affect revenues of a broader group of LRGs, including in particular the governments in London, Sydney, and Paris. Based on our estimates, business rates from offices represent about one-third of the Greater London Authority's (GLAs') budget revenues. Although central governments transfer to the GLA the agreed amount of revenues irrespective of the actual collections, a substantial reduction in collections could lead to a reduction in such transfers.

A lower demand for offices can also affect LRGs' finances more broadly than through these falls in revenue from direct property-related taxes and fees. A corresponding reduction in other taxes paid by landlords, smaller tax income from related construction and business services, and lower payments from related transportation, catering, and hospitality sectors could all lead to a more substantial decline in LRG budget revenues.

Table 3 

Regional Outlooks

North America

We maintain a negative bias on the rated North American office REITs given elevated debt leverage and high development exposure compared to other property types. In our view, office REITs in the U.S. will continue to feel mounting pressure on operating performance, which will likely limit improvement to credit protection metrics over the next 12 to 24 months. We expect debt leverage will remain elevated relative to pre-COVID levels for office REITs with larger development pipelines, despite pre-leasing progress. We expect rent concessions, including free rent periods, will continue to lengthen to the 12 to 14 months (per 10-year lease term) on average, delaying cash NOI generation. Given the risks of a recession, demand could further deteriorate from higher unemployment and weaker consumer spending.

Despite ongoing pressure, we believe a healthy tenant base comprised of well capitalized companies across diverse industries, the long-term nature of leases (six years remaining of lease term, on average), and well-staggered lease expiration profiles (with about 8% of annualized base rent expiring annually over the next two to three years) will mitigate an immediate disruption to cash flows from a broader adoption of remote working. We expect the flight to quality will widen the bifurcation between class A and class B properties. Recently completed developments such as SLG’s One Vanderbilt in New York is now fully leased with the highest rents per square feet in Manhattan. We believe the rated office REITs are generally well positioned to outperform market averages, despite secular headwinds over the medium term. Boston Properties, SL Green, Vornado, Kilroy, and Hudson Pacific own some of the highest quality buildings in the U.S. As of the end of the second quarter of 2022, the average occupancy rate for these gateway-focused office REITs was 91%, above the national average of 85%, In addition, Boston Properties and Kilroy are increasing their focus on life science assets, which should continue to exhibit stronger demand and rent growth compared to traditional office assets. We maintain a positive outlook on Alexandria Real Estate Equities, the leader in the life science sector among REITs.

Despite companies' efforts to bring employees back to the office as COVID vaccination rates increased, office buildings continue to show relatively low utilization levels. New York City and San Francisco, hubs for the largest number of in-office workers, exhibited office utilization levels in the 39% to 41% range the week of July 27, 2022, lagging the national average of 44% and significantly weaker than some Sunbelt markets in the 50% to 60% range, like Houston and Austin. Generally speaking, companies in financial services have been more aggressive in mandating employees to return to the office while technology companies have been more accommodative of employees working remotely. Recent market surveys suggest employees will be in the office three times a week on average, with the lingering question of whether mature companies will ever need more physical space than what they currently have. Leasing volume remains below pre-pandemic levels but has been recovering in recent quarters as tenants move forward with hybrid models. We think leasing activity could remain soft given a recent pullback in the tech sector, which had been a key driver of office space demand over the past five years. Office REITs focused in the Sunbelt markets, where job growth has been stronger and office utilization is higher, have outperformed gateway markets and we expect this trend to continue.

We believe the magnitude of the impact of remote working is still unfolding but growth is unlikely to recover over the next year. We think the increased adoption of remote working could ultimately result in a 15%-20% reduction in overall space required by tenants. Some of the excess space could be absorbed by new tenants and overall job growth from a rebound in the economy, but this will likely be extended beyond 2023 given the deteriorating macroeconomic conditions. Supply remains a near term challenge, particularly in New York City, and it might take years for new supply to be absorbed while development projects take longer to lease up and stabilize.

We rate 12 North American office REITs, out of which nine have stable outlooks, two have negative outlooks (SL Green and Office Properties Income Trust and one has a positive outlook (Alexandria Real Estate Equities). In our view, office REITs with lower leverage, smaller development pipelines, and a lower proportion of floating rate debt are better positioned to weather this challenging environment.

Chart 2

Chart 3


Hong Kong:  We expect the Hong Kong office market to remain soft over the next six to 12 months amid high vacancy rates. Vacancy rates in central Hong Kong stood at 7.6% as at May 2022, compared to the recent peak of 8% last year. While overall office rents show signs of stabilization since the third quarter of 2021, we believe a meaningful rebound in rental rates would be unlikely due to ample new supply in 2022 and 2023. There will be 3 million square feet and 2.5 million square feet of new grade A office supply in 2022 and 2023, respectively, accounting for around 6% of existing office space in Hong Kong.

We believe further recovery will need to be driven by the resumption of quarantine-free travels to Hong Kong and China's economic recovery, in our view. As the rental gap between Central and other non-core areas continue to narrow, we expect tenants with financial capability would consider relocate back into high quality Central grade-A office spaces from non-traditional CBD areas.

Tokyo:   Tokyo's office market could continue to be depressed over the next 2-3 years due to the spread of remote work during the pandemic and the massive supply of new offices. The vacancy rate in the five central wards of Tokyo stood at 6.4% in June 2022 and has remained almost flat since exceeding 6% in June 2021. According to an analysis by Nikkei, the level of attendance at work in the major districts of Tokyo, Yokohama, and Osaka in the fourth week of June 2022 remained at 60% of pre-pandemic levels, creating surplus space for many tenants. A large supply of new offices in 2023 will also weigh on supply and demand, in our view.

Still, the outlook on our rated issuers remains stable amid difficult market conditions. We believe each company can mitigate the effects of a softer market because their office properties are competitive in location and qualities. Vacancy rates for their assets have worsened as a result of the pandemic, but still remain below 5%, lower than the market average. In addition to long average duration of debt, which is longer than four years, and well diversified maturity profile, good relationships with domestic lender banks will continue to mitigate the risk of refinancing, in our view. The interest-coverage ratio for each rated issuers are very low, with funding rates below 1% and fixed rated debt ratios above 90% on average, giving them ample room to absorb any increase in interest rates.


European office prime rents have remained broadly stable or positive in central locations of large urban cities where vacancy remain low. Leasing activity and utilization rates (chart x and y) have bounced back since the pandemic, despite the rise of work from home, although they still somewhat lag pre-COVID levels and differ across cities. Occupancy has slightly declined in the main European markets, after reaching record highs in 2019, but it has stabilized and remains higher than 2016-17 levels on average. These trends must be looked at per sub-markets, as we note an important difference with non-central locations, where vacancy and rent incentives are still high.

We expect the overall eurozone unemployment to improve to 7.4% and 7.3% in 2022 and 2023, respectively (from 8.3% in 2021), and services activity continues to expand, generating additional future tenant demand for office space. But growth slowed sharply in June-July, with S&P Global Eurozone Services PMI down to 51.2 in July 2022 from 56.1 in May 2022. As a consequence, we think corporates' space expansion and overall leasing activity, mostly driven by the service sector, may slow down in the next quarters. This slowdown could be more pronounced if GDP growth and employment expectations were weaker than currently expected. Still, European real estate companies should see their rent supported by high indexation in 2022 and 2023, given we expect eurozone inflation to reach 7.0% and 3.4%, respectively.

Yields may potentially increase gradually, as interest rates rose sharply, dampening transaction activity after a strong post-COVID rebound (especially in Q4 2021 and Q1 2022). As prime property rental yields remain very low in core European office markets (below 3.5%), the extent of rising cash flows expectations in the next few years, notably thanks to inflation-linked rents indexation, could help offset rate hikes and support future asset valuations. We think prime offices that are centrally located in locations where supply and vacancy are low should be better positioned to pass on the current high inflation into rent increase, thus preserving asset value.

As we expect the cost of energy to grow materially in most European cities, we believe both investors and tenants will focus more on green and energy-efficient assets, generally certified by Bream, Leeds, or HQE.

Chart 4

Chart 5

Latin America

While market conditions remain challenging in Mexico City and Sao Paulo, we anticipate office space owners will continue adapting to retain and attract new tenants, and developers will proceed more cautiously on greenfield projects, reducing financing needs. Although we have a limited number of Latin America-based rated office real estate operators, our portfolio remains broadly stable so far. This is because rated entities predominantly focus on premium assets where most tenants have shown resilience to the COVID-19 crisis; however, we acknowledge that downside risks remain elevated.

As expected, Latin America's key gateway office markets (Mexico City and Sao Paulo) are still transitioning, with a slow and fragile recovery path. The incorporation of new projects in the context of slow economic activity, adoption of hybrid operating models--a mix of working from home and physical office presence--and new COVID-19 infection waves will likely keep the main office markets' utilization, space needs, occupancy rates, and rent prices below pre-pandemic levels in the near-term, and dent demand in the longer-term.

Moreover, our recent economic update for Latin America's two largest economies--Mexico and Brazil--signals sluggish economic growth prospect in 2022 and 2023. This includes GDP rates only growing at 1.7% and 1.9%, respectively, for Mexico, and 1.2% and 1.4% for Brazil. Moreover, tougher conditions ahead, including tightening global financial conditions, continued upward supply-side pressure on inflation, and greater uncertainty on global growth, could pose additional downside risks to our growth prospects and to key office markets (Mexico City and Sao Paulo).

The Mexico City office sector, in particular, is far from recovered, and new greenfield projects, the adoption of hybrid models, upcoming lease term expirations, recent uptick in COVID-19 cases, and the relatively low number of service sector jobs will continue to pose a challenge. Latest data published by CBRE show that class A/A+ office vacancy rates reached close to 24.7% in Q2 2022, up from 23.88% in Q4 2021, 22.4% in Q1 2021, and 20%, 14%, and 10% in 2020, 2016, and 2010, respectively. Moreover, given that supply remains higher than demand, asking rent prices are still down, at $22.48 per square meter (sqm)/month in Q2 2022, versus $23.08 in Q1 2021, and well below the $27.86 at the beginning of 2015. We expect this trend to endure at least for the next 12-18 months because five projects (+60,000 sqm) are planned to be incorporated by the end of 2022, and we believe this will maintain negative pressures on net absorption, vacancy, and rent prices. In that context, we expect developers to rethink their product offering and reduce speculative projects, while reducing their financing needs. Along those lines, the Mexico City government also recently modified its guidelines for the reconversion and adaptation of projects into residential use project, which in our view could gradually aid the sector's recovery.

In the case of Sao Paulo, the vast majority of small and medium size companies have already returned 100% of their employees in person to the office, while large companies are still facing dilemmas with hybrid, face-to-face, and remote work, according to Cushman & Wakefield's second quarter report. In Q2 2022, Sao Paulo's office market presented the highest net absorption since Q1 2020, with absorption of 78,600 sqm, mainly driven by the Paulista region (with 20,073 sqm absorbed) and Faria Lima region (with more than 14,000 sqm absorbed). As a result, vacancy rates reached 22.5% by the end of Q2 2022, only a slight improvement from 24.2% in Q1 2022, as return to office has been somewhat offset by the challenging macroeconomic environment with high inflation, interest, and unemployment rates. Average monthly asking price dropped to R$102.77 per sqm in Q2 2022, a 1% decrease quarter-over-quarter, due to departures in buildings in lower rental values, partially offset by increase in premium regions such as Itaim.

Related Research:

This report does not constitute a rating action.

Primary Credit Analyst: Ana Lai, CFA, New York + 1 (212) 438 6895;
Secondary Contacts: James M Manzi, CFA, Washington D.C. + 1 (202) 383 2028;
Fernanda Hernandez, New York + 1 (212) 438 1347;
Franck Delage, Paris + 33 14 420 6778;
Alexandre P Michel, Mexico City + 52 55 5081 4520;
Esther Liu, Hong Kong + 852 2533 3556;
Stuart Plesser, New York + 1 (212) 438 6870;
Felix Ejgel, London + 44 20 7176 6780;

No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at

Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back