“​​We think values in Seattle and San Francisco are both set to fall by another 25% at least from end-2023 levels,” Kiran Raichura, the research firm’s deputy chief property economist, wrote on Monday. 

Office-based job growth was weak in several sectors last year, but the “big loser” 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—and if it isn’t clear, that’s not good for office buildings. 

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.

That isn’t to say there aren’t 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. 

“Of 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,” 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—all bad for capital values. 

In the first quarter of this year, office vacancies set a new all-time high at a rate of 19.8%—and 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, they have risen because of an increase in inventory; in San Francisco, vacancies rose because occupancy of available space has fallen. 

“Looking 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,” Raichura wrote. “San Francisco and Austin are likely to be close behind.” But Capital Economics predicts vacancies in Austin will peak in 2026, and after that, it “will join the other southern metros in enjoying a decent recovery.”

Rents have been surprisingly resilient, Capital Economics said—apart from San Francisco, that is. Still, the research firm sees rents falling in New York City, San Diego, San Jose, Seattle, and San Francisco, at least until the end of 2025 for the latter three cities. Southern markets will lead the way in rents, though.

Nevertheless, “all office markets still look overvalued,” 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’ call that San Francisco and Seattle will see the greatest falls in office values between this year and the end of next year. 

“Combing 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,” he wrote. In Dallas, and a couple other markets, it’ll be half that. Still, capital value falls will be “far larger than those seen in the post-GFC period,” Raichura added, referring to the Great Financial Crisis.

Last year, Raichura and Capital Economics predicted San Francisco’s office sector would be at the epicenter of the crash. It doesn’t seem that’s changed.