Tech Sector Downsize Further Challenges Office Recovery  

Key takeaways:

• The average U.S. office listing rate stood at $38.06 per square foot, down 3.1% year-over-year
• Up 110 basis points year-over-year, the national vacancy rate rested at 16.2%
• Under-construction office space totaled 132 million square feet in November
• $80.4 billion in office sales were closed in the first 11 months of the year
• Seattle moved forward with 5.6 million in office projects despite tech layoff challenges
• At $124 per square foot, Twin Cities’ sales price remained the lowest among leading office markets
• With a sales volume of $3.66 billion, Atlanta was on track to surpass 2021 totals
• Manhattan vacancies still rising but the market still commanded the nation’s highest asking rent at $75 per square foot

Trends & Industry News: Tech Lays Off Workers and Downsizes Offices

Fueled by an abundance of cheap capital and investor search for yield, tech companies rapidly expanded in recent years, hiring thousands of workers as they competed for talent. This year, those companies have reversed course and begun to shrink their payrolls.

However, tech companies have not only been laying off workers in an effort to cut costs but are also downsizing office footprints, especially in gateway markets, data from CommercialEdge’s latest U.S. office market report reveals. Meta, for example, has already given up its presence at four office buildings and is set to give up its presence at two more — and this only since its third-quarter earnings call.

We’re paying close attention to WFO policy announcements and whether companies follow through with implementation, or if they continue to kick the proverbial can down the road.

Peter Kolaczynski, CommercialEdge Senior Manager

With so many headwinds already facing the office sector, the tech pullback is yet another headache, putting upward pressure on U.S. vacancy rates. An industry that was a major driver of office leasing in recent years is now reversing course, but there are some silver linings. Giants like Apple and Twitter have been leading the return-to-office this year, and tech companies both small and large have eschewed fully remote work, meaning that tech will still be an important demand driver, allowing for a more optimistic office real estate outlook for 2023.

Listing Rates and Vacancy: National Vacancy Rises 110 Basis Points Year-Over-Year

The U.S. office vacancy rate was 16.2% at the end of November, an increase of 110 basis points over the last twelve months and 10 basis points higher than in October. Considering the large scale of layoffs and rapid pace of office downsizing and consolidation in the tech industry — one of the most important drivers of office demand and office use in the past decade — vacancies could rise further, especially in markets with a heavy tech presence. After all, as previously reported, vacancies rose in 86 of the 120 markets covered by CommercialEdge, according to last month’s U.S. office market report.

Top Listings by Metro Area: November 2022

Meta, for example, will take a $2 billion write down to consolidate offices across some of the largest office markets in the U.S., mainly by subleasing space and backing out of lease commitments, including recent ones. For example, in Austin, Meta will look to sublease a 589,000-square-foot space at 400 West Sixth Street, a mixed-use property where it signed a lease in January of this year. In Silicon Valley, it vacated The Village at San Antonio Center, while in NYC Meta is set to give up its footprint at four addresses.

But it’s not just Meta downsizing office footprints: Salesforce will sublease around 40% of its 43 floors at Salesforce Tower in San Francisco, while Lyft plans to sublease about 45% of its presence across New York, Seattle, Nashville and San Francisco.

Price Per Square Foot by Asset Class

At the same time, the average full-service equivalent listing rate was $38.06 in November, down 3.1% year-over-year but up 12 cents over October. That decrease was mostly fueled by negative growth for Class B and Class C spaces, as Class A and A+ office rates were up 1.6% for an average $46.96 per square foot. Specifically, Class B offices recorded a 6.0% decrease for an average rate of $30.30 per square foot, while listing rates for Class C spaces contracted 12.9% year-over-year, closing November at an average $23.05 per square foot.

In terms of location, rates for CBD spaces recorded a 0.2% year-over-year decrease in listing rates for an average of $50.87 per square foot. At the same time, suburban buildings saw listing rates decrease 4.2% year-over-year, closing November at $30.33 per square foot. Urban offices were being leased at an average of $44.70 per square foot following a 4.4% contraction over the past 12 months.

Supply: Office Sector on Track to Surpass 2021 New Start Figures

Nationally, 132.3 million square feet of office space was under construction at the end of October, the equivalent of 2.1% of existing stock. Another 6.3% were in the planning stages, despite continuously weakening office occupancy rates, driven by challenges such as hybrid work, rising costs of capital and a potential looming recession.

Office Space Under Construction & Planned

In fact, the office sector is on track to have more square feet of starts in 2022 than last year, despite cancellations and postponements from large tech players. For example, Amazon halted the construction of new office buildings in Nashville and Bellevue. However, through November, nearly 56 million square feet of new office space began construction. By comparison, in 2021, a total of 58.2 million square feet of space started construction.

Transactions: Average National Sale Price Hovers at $253 per Square Foot

CommercialEdge has recorded $80.4 billion in office transactions through the first 11 months of the year. Of this, Manhattan alone accounted for $5.88 billion and was the only market to surpass $5 billion in sales. However, Boston, the Bay Area, Washington, D.C. and Dallas each recorded more than $4 billion.

Year-to-Date Sales (Millions)

While Atlanta didn’t surpass the $4 billion threshold, its $3.66 billion sales volume still made it stand out as the market is on track to surpass last year’s total of $3.7 billion. Not only that, but it’s also one of the few markets where the average sale price has increased this year. from $211 per square foot in 2021 to $229. However, San Francisco remains by far the national price leader at $940 per square foot. For comparison, the year-to-date average national sale price stood at $253 per square foot at the end of November.

Western Markets: Seattle Pipeline Large Despite Challenges

Despite a slowdown in the tech industry, which makes up an outsized portion of the market's office utilization, the new supply pipeline in Seattle remains substantial. More than 5.6 million square feet are under construction in the Emerald City, 1.3 million of which began construction in 2022. Tech layoffs in the market have been widespread, from giants like Amazon and Meta to real estate tech firms Redfin and Zillow, which will put some downward pressure on office demand and occupancy rates.

Yet, despite job losses in high-profile tech companies, office-using sectors of the labor market in Seattle have grown 6.5% year-over-year according to the Bureau of Labor Statistics. But with a vacancy rate that has increased 140 basis points over the last year and now sits at 18.1%, absorption of this new stock could take a while.

Especially considering that layoffs are being paired with office downsizing: Lyft announced it will sublease about 45% of its office footprint across San Francisco, New York, Seattle and Nashville. Salesforce too is looking to sublease around 40% of its 43 floors at Salesforce Tower in San Francisco — a market still struggling with one of the highest vacancy rates among the country’s top office markets. In fact, its 19.06% vacancy rate is the highest on the West Coast, as is its 4% year-over-year increase in vacancies.

Following close behind San Francisco was Denver with the next-highest vacancy rate (18.71%) and the next-highest increase in that rate (2.66%). The lowest vacancy rate (14.48%) on the West Coast was registered in San Diego which does have a significant life science sector, while the Bay Area — another region with a healthy life sciences industry — recorded the lowest increase in vacancies over the past 12 months at just 0.07%.

Despite its high vacancy rate, San Francisco still commands the highest asking rent on the West Coast. In fact, its $67.03 per square foot rate was second only to Manhattan on a national level. Next up, the Bay Area stood at $55.75 per square foot, followed by San Diego at $43.72 per square foot, maintaining its recently gained lead over Los Angeles, now at $42.09 per square foot.

West Regional Highlights

In terms of sales, the Bay Area remained by far the leader of the West Coast with a sales volume of $4.42 billion, with Los Angeles’ $3.28 billion sales total the next highest. However, San Francisco still commanded the highest year-to-date price per square foot by a vast margin, coming in at $940 per square foot. Seattle’s $550 per square foot rate was the next highest. At the same time, San Diego further stood out, having reached a $448 per square foot year-to-date sale price, surpassing the Bay Area by $6 and Los Angeles by $15.

Midwestern Markets: Chicago & Twin Cities Post Some of the Lowest Asking Rents Among Leading Markets

Chicago continued to have one of the most robust sales markets in the country, closing $3.15 billion in office sales year-to-date. In fact, it closed $270 million in office sales since last month, climbing one position to become the ninth-hottest sales market for office assets nationwide. And it did so with one of the lowest prices per square foot among leading U.S. office markets: Only Philadelphia, Orlando, Houston and the Twin Cities had a lower price than Chicago’s $186 per square foot rate.

Midwest Regional Highlights

The Twin Cities’ $124 per square foot was the lowest sales price among the top 25 office markets, while its $978 million sales volume was also among the lowest nationwide. The Twin Cities also had one of the lowest construction pipelines at 569,500 square feet, with only Tampa’s 343,773-square-foot pipeline lower.

While the Minneapolis – St. Paul market had the equivalent of 0.5% of its existing footprint under construction, Chicago’s nearly 3 million-square-foot pipeline accounted for 1% of its existing stock, with an additional 6.63% in the planning stages. Chicago also had one of the highest vacancy rates nationwide at 19.35%, but that rate has increased very little over the past 12 months, rising only 0.33%.

Asking rates have been on the rise in the Windy City, but Chicago’s $27.89 per square foot listing rate was one of the lowest among the country’s top markets. The same was true for the Twin Cities’ $26.13 per square foot rent rate.

Southern Markets: Austin Market Strong Despite Rising Vacancies

Austin has been the fastest-growing office market in the country since the start of the pandemic, with office-using sectors of the labor market adding 85,000 jobs (an increase of 28%) in the last 30 months. Developers have responded to this growth, with more than 3.1 million square feet of new office space, representing 3.6% of stock, completed this year alone.

With deliveries hitting the market at this pace, the 100-basis-point increase in vacancy rates over the past 12 months appears minor. The same can be said about Meta’s downsize in this hot office market: The tech giant will look to sublease a 589,000-square-foot space at 400 West Sixth Street, a mixed-use property where it signed a lease in January of this year.

South Regional Highlights

Despite being one of the strongest office markets in the country, Austin’s average full-service-equivalent listing rate has fallen 3.3% over the past 12 months. This was in part due to numerous listings hitting the market at a rate lower than the market average, bringing Austin’s average asking rate to $41.81 per square foot. But Austin also had the largest supply pipelines in the country on a percentage-of-stock basis, with the equivalent of 8.8% under construction. Not only that, but planned projects would further increase its stock by 22.8%.

Atlanta too, stood out from the pack when it comes to office sales in 2022. Not only is the market on track to surpass last year’s sales volume of $3.7 billion but it is one of the few markets where the average sale price has increased this year, rising to $229 from $211 per square foot in 2021. The sale of the 1.3 million-square-foot Bank of America Plaza — a 55-story tower that is an iconic part of the city’s skyline — has been the largest this year.

Nashville is also among the cities with notable tech downsizing. Specifically, Amazon halted construction of a new office building in Nashville, while Lyft’s 45% sublease of its footprint will also include space reductions in Music City. Currently, Tennessee’s top office market has a vacancy rate of 17.80%, having inched down just 0.11% over the past year. At the same time though, asking rents rose a little over 3% year-over-year, bringing the average rate to $31.20 per square foot.

Meanwhile Miami continued to see rapid increases in office rents, with its average asking rate reaching $49.62 per square foot for the priciest market in the South. Austin and Washington, D.C. were the next priciest markets in the region with average rents of $41.81 per square foot and $41.53 per square foot, respectively.

Washington, D.C. also stood out in terms of sales: At $4.29 billion, the capital had the largest sales volume in the South and the fourth-highest nationwide. Dallas and Atlanta followed close behind with sales volumes of $4.16 billion and $3.66 billion, respectively. In fact, Dallas had the fifth largest office sales volume nationwide, having reached that position with one of the lowest prices per square foot. Its $187 year-to-date sales price outperformed only Chicago, Philadelphia, Houston, Orlando and the Twin Cities.

Northeastern Markets: Meta Downsize Targets Four Manhattan Office Buildings

The ongoing tech downsize was bound to also make its presence felt in the Northeast, specifically New York City. Lyft is set to cut its office footprint by 45% across four cities, including NYC, while Meta is looking at reducing its footprint at four addresses by subleasing space and backing out of lease commitments.

In fact, the tech giant said on its third-quarter earnings call that it will take a $2 billion write down to consolidate offices across multiple locations in the U.S. In Manhattan, the firm has backed out of a 300,000 square-foot commitment at 770 Broadway, vacated its space at 225 Park Avenue, and will not renew leases at two buildings in Hudson Yards.

Manhattan closed November with a vacancy rate of 14.83%, having risen 3.46% over the past 12 months, while Brooklyn stood at 17.70%. New Jersey too had a similarly high vacancy rate at 17.47%, while its average asking rent stood at $32.99 per square foot, having slipped 0.54% year-over-year.

Boston, as one of the markets with the lowest vacancy rates on the East Coast, closed November at $37.52 per square foot after inching up 0.36% year-over-year. Manhattan, of course, still commands the highest asking rents in the U.S. at $74.73 per square foot, but rates have continued to slip, coming in 4.27% below year-ago levels.

Northeast Regional Highlights

Despite high vacancy rates, Manhattan developments are still continuing: More than 15 million square feet of office space are under construction, the equivalent of 3.4% of its existing stock. Another 5.9% were on the drawing board at the end of November. Boston had a similarly large development pipeline at more than 13 million square feet, which will increase the city’s office footprint by 5.6%. And if all planned projects materialize, Boston will add the equivalent of another 11.8% of space.

Boston also performed well when it came to sales, closing $4.66 billion in office sales year-to-date for the second-highest volume nationwide. It was, of course, surpassed only by Manhattan’s $5.89 billion sales volume. Manhattan achieved that figure with a year-to-date price per square foot of $828, surpassed only by San Francisco’s $940 rate.

And while Brooklyn had one of the lowest sales volumes among leading office markets with a total of just $767 million, it still commanded one of the highest prices at $532 per square foot. Meanwhile, New Jersey had the seventh highest sales volume nationally, with its $3.41 billion total surpassing Los Angeles, despite having a much lower price per square foot: $231 versus $434.

Office-Using Employment: Job Growth Cools in Office Sectors

Office-using sectors of the labor market added 39,000 jobs in the month of October. The three sectors have seen growth slow in recent months after starting the year strong. Between January and July, more than 108,000 office jobs were added per month on average. August through October, the average has been slightly north of 41,000.

Metro employment data for September, which trails the national release, shows the Sunbelt leading the way in office jobs growth, with Dallas increasing 8.0% over the last year, Atlanta 7.7% and Charlotte 7.2%, Austin 6.2% and Nashville 5.7%. Gateway and tech-centric markets have also seen large gains year-over-year with San Francisco growing 7.0%, Seattle 6.5%, New York 5.8% and Boston 5.0%.

Office-Using Employment Growth by Sector

However, unlike the Sunbelt markets at the top of the list, gateway markets have been slow to recover jobs lost to the pandemic, finally surpassing February 2020 levels of employment this year, whereas the Sunbelt markets have long since recovered and continued to grow in 2022.

At the same time, however, layoffs in the tech industry have been widespread, even as other sectors of the labor market have added workers. According to Layoffs.fyi, more than 130,000 tech layoffs have occurred across nearly 1,000 tech firms since the second quarter. The list of companies with large-scale layoffs this year reads like a who’s who of last decade’s tech darlings. Among the biggest names, Meta is laying off 11,000 employees, Amazon is dropping 10,000 and Twitter has cut more than half of its staff. Uber laid off more than 3,000 and Snap is planning to let go a fifth of its workers.

With so many headwinds already facing the office sector, the tech pullback is yet another headache. An industry that was a major driver of office lease in recent years is now reversing course, but there are some silver-linings. Giants like Apple and Twitter have been leading the return-to-office this year, and tech companies, both small and large, have eschewed fully remote work, giving space for a brighter office market outlook. Long term, laid-off tech employees may find new businesses that drive office demand in the later half of this decade, much like they did in the rebound from the Great Financial Crisis.

Download the PDF report to view more, including the map for office-using employment growth.

You can also see our previous office reports.

Methodology

This report covers office buildings 25,000 square feet and above. CommercialEdge subscribers have access to more than 14,000,000 property records and 300,000 listings for a continually growing list of markets.

CommercialEdge collects listing rate and occupancy data using proprietary methods.

• Listing Rates — Listing Rates are full-service rates or “full-service equivalent” for spaces that were available as of the report period. CommercialEdge uses aggregated and anonymized expense data to create full-service equivalent rates from triple-net and modified gross listings. Expense data is available to CommercialEdge subscribers. National average listing rate is for the top 50 markets covered by CommercialEdge.
• Vacancy — The total square feet vacant in a market, including subleases, divided by the total square feet of office space in that market. Owner-occupied buildings are not included in vacancy calculations.
• A and A+/Trophy buildings have been combined for reporting purposes.

Stage of the supply pipeline:

• Planned — Buildings that are currently in the process of acquiring zoning approval and permits but have not yet begun construction.
• Under Construction — Buildings for which construction and excavation have begun.

Office-Using Employment is defined by the Bureau of Labor Statistics as including the sectors Information, Financial Activities, and Professional and Business Services. Employment numbers are representative of the Metropolitan Statistical Area and do not necessarily align exactly with CommercialEdge market boundaries.

Sales volume and price-per-square-foot calculations for portfolio transactions or those with unpublished dollar values are estimated using sales comps based on similar sales in the market and submarket, use type, location and asset ratings, sale date and property size.