The biggest reason for the distress in the US office sector is the increasing cost of debt. With inflation surging, the US Federal Reserve has increased the federal funds rate over the past 12 months by 450 basis to 4.75%. Because most major office properties in the US are encumbered by substantial debt, the increased cost of borrowing has vaporized owners’ equity in many properties. 

The larger long-term problem is that workers in the US have only returned to the office at about 50% of pre-pandemic levels and tenants are often vacating or downsizing their space when leases expire. This shift in demand has put downward pressure on effective rents and occupancy rates and caused investment to dry up. 

 By contrast, the office sector in Brazil is faring much better. US-style highly favorable debt did not exist in Brazil and so its office segment is not suffering the same level of default. Even more important, corporate employees in Brazil have largely returned to the office because cultural norms and residential space constraints are not conducive to remote work. According to SiiLA, as of year-end 2022, the vacancy rate for Class A and A+ properties in Brazil’s premier Faria Lima submarket stood at just 5.07% and the average asking rent had increased by 15 percent over the prior year. This is in sharp contrast to Mid-town Manhattan where office vacancy rates are hovering near 17 percent, rents are stagnant and the prospects for near-term improvement are few.

Even as Brazil continues to endure significant political and economic turbulence, its high-end office markets do not have the same degree of structural problems that those in the US do. This fact could catch the attention of foreign investors in the near term, especially considering the historically favorable exchange rate. This sentiment is echoed by Giancarlo Nicastro, CEO of SiiLA, who asks, “What would you rather own: an office property in Midtown Manhattan that is 20 percent vacant, has debt that cannot be refinanced, and is underutilized by its tenants, or an office property on Faria Lima that is owned free and clear, operating at full capacity with growing rents?” 

Do you want to know more about the commercial real estate market and our coverage in Latin America? Visit our website and discover the solutions available for investors, property owners, and much more.