Office vacancies hit a record high in the fourth quarter of last year, surpassing previous peaks last reached in 1991 and 1986, according to data from Moody's Analytics out Monday.

Why it matters: Office buildings are emptying around the U.S., as companies continue to adapt to the new norms of remote and hybrid work by shrinking their physical footprints.

• The transition marks an enormous societal shift as Americans adjust to a whole new way of working and living — big changes are underfoot in cities and suburbs around the country.
• Yet it's happening so slowly and in such a predictable fashion, that the impact on the overall economy so far has been minimal.

State of play: The stickiness of hybrid work arrangements "muted office demand," per the report, which says 2023 was "the most downbeat" year in the office sector since the global financial crisis.

• "Even though 2023 was largely a year of companies and organizations calling people back into the office, we're not seeing that it's typically the standard five days a week back," said Nick Luettke, an associate economist at Moody's Analytics CRE. "Hybrid models and flexibility [has] really become the name of the game."

Zoom out: Unlike past crises, vacancies increased last year while the economy was in good shape overall.

• "If the soft landing is pulled off, [vacancy] numbers are probably not going to rise to much higher than this," Luettke said. "But if things do take a turn for the worst in 2024, it'll probably just keep going for much of the year."
• Even when we're through the transition in the market, the natural office vacancy rate will likely be higher than it was pre-pandemic, he said.

What's next: We're moving toward a new era for the office. Say goodbye to central business districts centered around big office buildings and hello to more mixed-use setups — areas with office buildings and retail and entertainment, etc.

• A similar transition happened in the retail sector — online was supposed to kill brick-and-mortar retail, instead, it transformed in-person shopping. "Office spaces might be the same," Luettke said.

Between the lines: For office landlords, of course, this isn't great. But overall, the high vacancy rate has been priced into the market, so the systemic risk posed by the office sector appears fairly minimal.

• Moody's "does not believe this will become a source of systemic risk for the overall banking system."
• Much of the risk from commercial real estate has been priced into public debt markets, Goldman Sachs analysts noted in December. "[B]anks' limited exposure to office real estate should be manageable."

The big picture: This is not just a pandemic trend. The office market's current troubles go back to the 1980s, as the WSJ, which first reported the vacancy data, noted this week.

• Back then a construction boom, particularly in the South where "land was cheap and red tape sparse," led to overbuilding.
• When a recession hit in the early 1990s, a glut of buildings couldn't find tenants. "That glut weighs on the office market to this day and helps explain why vacancies are far higher in the U.S. than in Europe or Asia," WSJ reports.
• Five of the 10 cities with the highest vacancy rates in 2023 were in the South — including Houston, Dallas, Austin, Tampa and Jacksonville, per Moody's.