Q1 Records Only $6.5 Billion in Office Sales as Decreasing Demand Brings 66% Year-over-Year Drop

Key Takeaways

• The average U.S. office listing rate stood at $38.22, rising 1.5% year-over-year 
• Up 20 basis points year-over-year, the national office vacancy rate rested at 16.7% 
• Under-construction office space totaled 117.5 million square feet at the end of the month, of which only 6.1 million broke ground this year   
• Office sales stood at $6.5 billion in the first three months of 2023, with assets trading at $195 per square foot  
• Denver reached the highest vacancy rate outside the South at 19.4%  
• At $66 per square foot, Chicago posted the lowest sales price among leading office markets  
• Austin listing rates fell 5.5% year-over-year, influenced by rising vacancies and expensive spaces coming off the market 
• Boston closed Q1 with the largest under-construction pipeline in the U.S. at 13 million square feet as the life sciences sector continues to thrive 

In the first quarter of 2023, the U.S. office market continued to face several challenges, from rising interest rates to declining values, decreasing demand and the looming threat of maturing loans. With so many headwinds impacting the sector, office landlords are faced with tough decisions as the future of offices remains unclear, especially as sales activity continues to rapidly decelerate, the latest U.S. office market report shows.  

Thanks to government incentives in some markets across the nation, office-to-residential conversions are starting to gain traction among office owners, however, not all vacant offices will be suitable for conversions, due to either their location or the configuration of the buildings.   

As a larger portion of the existing office space becomes functionally obsolete, the idea of converting these spaces into residential is going to be more prevalent as conversions look to be a more viable option than initially thought.

Peter Kolaczynski, CommercialEdge Senior Manager

In response to all the challenges, the office construction pipeline has gradually decreased over the last few years. Nationally, developers started construction on just 6.1 million square feet of office space so far this year, less than half the 14 million square feet started over the first quarter of 2022. National office market outlooks predict that construction starts will remain muted for the foreseeable future, while life sciences or solid pre-leases will mostly drive new construction. 

Listing Rates and Vacancy: National Listing Rate Inches Up 1.5%, Class A Gains 2.2% 

The national average full-service equivalent listing rate was $38.22 per square foot in March, the U.S. office market report reveals, increasing 1.5% over the previous 12 months. Across A and A+ office spaces that increase amounted to 2.2% year-over-year, reaching a national average of $46.76 per square foot, while Class B offices remained nearly flat at $30.41 per square foot. Listing rates for Class C spaces continued to decrease, closing March at 6% under year-ago figures. 

Location-wise, suburban assets remained in the lead for rent increases, rising 3.8% year-over-year to $30.91 per square foot, followed by CBD offices at $51.20 after a 12-month gain of 3.6%. Urban office spaces remained on a downward trend, decreasing 3.8% year-over-year to $43.81.  

At the market level, Manhattan, San Francisco and the Bay Area remained the priciest office markets nationwide with asking rents at $74.22 per square foot, $66.07 per square foot and $57.41 per square foot, respectively. 

Top Listings by Metro Area: March 2023

The U.S. office vacancy rate in the month of March was 16.7%, up 80 basis points over the prior year. Urban (16%) and suburban (16.4%) assets were under the national average vacancy rate, with CBD office spaces pushing the national average up with their 18% vacancy rate. Across the 25 largest office markets in the U.S., occupancy rates continued to drop, with only 10 markets logging decreases in vacancy rates, all of which were less than 3.5%. 

Boston, Charlotte and Philadelphia had some of the lowest office vacancy rates in the U.S., while Brooklyn, Austin and Houston posted some of the highest. In fact, Houston’s 23.42% rate was the highest among the nation’s most significant markets, even though it had ticked down nearly 1.5% year-over-year.

Supply: Life Sciences, Solid Preleases and Owner-Occupied Buildings Expected to Drive Much Of 2023’s Development 

Nationally, 117.5 million square feet of new office stock was under construction as of March. This number has steadily decreased over the last few years, as many properties have been delivered while new buildings have not been starting at the same rate. In fact, only 6.1 million square feet of new office stock has started construction this year, according to the latest U.S. office market report.

Office Space Under Construction (Million Sq. Ft)

It is anticipated that starts will remain subdued for the foreseeable future, with most office buildings that begin construction being life science properties, owner-occupied or attached to solid preleases. For example, Boston, the largest life science hub in the nation, should continue to see office starts. There were more than 13 million square feet under construction in the market, of which lab space has a large share. 

For example, the 960,000-square-foot Fenway Center will offer a mix of lab space and a general office overlooking Fenway Park. In addition, BioMed Realty is developing 585 Third St. in Cambridge, already fully leased to The Takeda Pharmaceutical Co. But not all of Boston’s under-construction stock is lab space, though. The 1.1 million-square-foot One Post Office Square Redevelopment in the CBD, begun in 2019, is set to deliver this year. 

Transactions: Outliers to Sway Averages in 2023

The U.S. office market has seen $6.5 billion in transactions so far in 2023, with buildings trading at an average of $195 per square foot. By comparison, Q1 2022 logged $18.9 billion, marking a 66% drop in transactions year-over-year. With sales subdued in 2023, large trades are expected to have a greater impact on market totals and averages. 

2023 Year-to-Date Sales (Millions)

In New York City, for example, $417 million in office transactions have occurred so far, at an average of more than $1,000 per square foot. However, that mark is heavily influenced by Hyundai’s $274 million purchase of Fifteen Laight in the desirable Tribeca neighborhood. The building, outside the Holland Tunnel, will feature a ground-floor showroom and more than 100,000 square feet of office space. 

Western Markets: Bay Area Leads Office Construction and Sale Prices in the West  

Among Western markets, Los Angeles and San Francisco had the largest sales volumes, closing $343 million and $316 million in office deals in the first three months of the year. Conversely, Seattle’s $46 million total was the fourth lowest among the top 25 office markets in the U.S. Additionally, Portland and the Bay Area also saw deal activity slow, both totaling $53 million in office transactions. But, despite its modest deal volume, the Bay Area boasted the second-highest sale price among leading U.S. office markets at $604 per square foot, while San Francisco was fourth at $520 per square foot. 

And while Seattle and the Bay Area had some of the lowest sales volumes nationwide, they also posted some of the largest supply pipelines in the first quarter of the year. Seattle’s 6.41 million and the Bay Area’s 5.71 million square feet of under-construction spaces were joined by San Diego’s 4.91 million square feet among the 10 largest office construction pipelines in the country.  

Phoenix and Portland stood on the opposite end of the spectrum: Phoenix had 860,000 square feet under construction for the fourth-lowest pipeline, while Portland’s 566,000 square feet placed it last among the leading 25 office markets in the country. 

West Regional Highlights

Vacancy rates across the West’s leading office markets tended to stay above the national average of 16.72%. San Diego had the lowest vacancy rate among Western markets at 14.43%, with Los Angeles in a similar situation, while Portland was just 5 basis points under the national average. Denver had the lowest office occupancy rate among the top Western office markets, with vacancies reaching 19.39% at the end of the first quarter after a 2.21% year-over-year increase. 

San Francisco and the Bay Area also led in terms of asking rents, surpassed only by Manhattan’s $74.22 rate. Specifically, San Francisco’s listing rates averaged $66.07 in March, while the Bay Area rose 0.90% to $57.41 per square foot. Conversely, Phoenix posted the lowest listing rates among the West’s leading markets, closing March at just $27.51 per square foot. 

Midwestern Markets: Chicago Posts Lowest Sales Price Among Leading Office Markets 

Chicago’s office occupancy rate was mostly in line with other major office markets. Its 19.12% vacancy rate was nearly equal to those of Atlanta (19.83%), Brooklyn (19.38%) and San Francisco (19.05%). The Twin Cities, on the other hand, had one of the lowest vacancy rates among the country’s 25 most important markets, closing March at 15.88% after increasing 40 basis points month-over-month. Compared to year-ago figures, the vacancy rate of the Twin Cities was up 1.35%. 

Listing rates rose in both of the Midwest’s two main office markets over the past 12 months, with Chicago reaching $28 per square foot and Minneapolis – St. Paul at $26.93 per square foot. However, office rents in Chicago and the Twin Cities remained on the lower end of the pricing spectrum among the country’s leading markets.  

Midwest Regional Highlights

The Twin Cities also had one of the smallest supply pipelines nationwide, with only 616,000 square feet of office space under construction, accounting for 0.5% of the market’s stock. Only Portland’s 566,000-square-foot pipeline was smaller. Chicago, on the other hand, had 3.68 million square feet of office space under construction at the end of Q1, with nearly four times as much in the planning stages, the U.S. office market report revealed.

Similarly, Chicago and the Twin Cities also had some of the smallest sales volumes and lowest sale prices among the top 25 U.S. office markets. Specifically, Chicago closed $127 million in office sales in the first quarter of the year, while the Twin Cities totaled a mere $48 million. Additionally, the average price per square foot in the Twin Cities stood at $159 per square foot, while Chicago closed Q1 at just $66 per square foot, marking the lowest price per square foot among the country’s top 25 markets. 

Quarterly Transactions Volume

Southern Markets: High-Quality Space Leases in Austin Bring Listing Rates Down 

Miami continued to be the most expensive office market in the South, with asking rents coming in at $47.27 per square foot, followed by Austin’s $40.95 per square foot and Washington, D.C.’s $40.44 per square foot. However, in Austin, one of the stronger markets for offices since the pandemic, average listing rates have fallen 5.5% year-over-year, in part due to expensive space coming off the market. 

In downtown Austin, recent leases signed by tech companies, such as TikTok at 300 Colorado, and Snap at 405 Colorado have taken high-quality listings off the market, driving down the average rate. If trophy properties like Indeed Tower can secure leases, especially at the full-service equivalent asking rent of $76.67 per square foot , yet another expensive listing will go off the market, which may result in the market average slipping further.

South Regional Highlights

At the same time, Austin had the largest construction pipeline in the South with 6.2 million square feet of office space underway, accounting for 7.0% of total stock — on a percentage-of-stock basis Austin also led the nation in development. Considering projects in the planning stages, Austin’s office footprint could increase by as much as 23.9%. On a percentage-of-stock basis, Nashville had the second-largest pipeline in the region and nationwide, with projects underway accounting for 6.4% of existing inventory. 

On the other end of the spectrum stood Washington, D.C., with its 3.8 million-square-foot development pipeline accounting for a mere 1.0% of the local inventory. The slower construction pipeline is not surprising, considering that the market has been one of the most active when it comes to office-to-apartment conversions, with 2.5 million square feet designated for redevelopment.  

Looking at sales activity, Miami and Houston were the most attractive among Southern markets, with a total of $435 million and $431 million in closed office deals, respectively. Nationwide, the two markets were only outpaced by Boston’s $680 million sales volume. Miami also had the highest sale price in the region, with assets trading at an average of $396 per square foot. Austin, Dallas and Washington, D.C., followed with a sale price of $392 per square foot, $344 per square foot and $311 per square foot, respectively. 

Northeastern Markets: New Lab Space Plentiful in Boston as It Leads Nationwide Office Development 

As the largest life science hub in the nation, Boston should continue to see new projects breaking ground. There were 13.1 million square feet under construction in the market representing 5.5% of its existing stock, with an additional 5.7% in the planning stages. Considering the high levels of activity in Boston’s office market, especially for properties with life science components, Boston will likely continue to outperform many of its Northeastern counterparts. 

Northeast Regional Highlights

Manhattan also closed the first quarter with a generous supply pipeline of 9.27 million square feet and nearly as much office space in the planning stages. On the other end of the spectrum stood Brooklyn and New Jersey with about 1.5 million square feet under construction, each.  

This came as both Brooklyn and New Jersey, as well as Manhattan had vacancy rates above 15%. Specifically, Brooklyn stood at 19.38% after vacancies rose 2.17% year-over-year. Manhattan office vacancies rose at a similar pace, increasing 2.26% to close Q1 2023 at 16.47%. New Jersey’s 17.01% vacancy rate remained stable overall, sliding a mere 0.56% year-over-year.  

In terms of listing rates, Boston inched down at a similar rate of 50 basis points year-over-year to reach $38.77 per square foot. Asking rents trended up in both New Jersey and Philadelphia, reaching $33.13 per square foot and $31.37 per square foot, respectively. And while Brooklyn asking rents trended down, they still remained higher than the previous three cities, stabilizing at $42.45 per square foot by the end of the first quarter.  

While rent growth was indeed muted in Manhattan, the market remained leaps and bounds ahead of other major Northeastern office markets at $74.22 per square foot.  

Manhattan also led by a significant margin in terms of office sales as well, posting the highest sales price at $1,000 per square foot, while Boston was third in the country at $555 per square foot. Meanwhile, Philadelphia and New Jersey office spaces sold for $144 per square foot and $106 per square foot, respectively, for some of the lowest office prices nationwide.  

Sale Price Per Square Foot

Boston also boasted the largest sales volume of any of the top 25 office markets in the country, totaling $680 million in sales in the first quarter of the year. At $417 million, Manhattan had the fourth highest and at $371 million, New Jersey had the fifth highest sales volume.  

Office-Using Employment: Texas Leads Nation in Office Job Gains 

Office-using sectors of the labor market added 44,000 jobs in the month of March and have grown 2.0% year-over-year. Metro employment data for February, which trails the national release, shows Texas markets leading the nation in office-using job growth.  

Office sectors have grown 5.9% year-over-year in both Dallas and Houston and 5.5% in Austin, the three highest marks among the largest office markets in the U.S. Since the start of the pandemic, both workers and firms have relocated to the Lone Star State in large numbers, driving office-using job growth in the state’s top markets. 

Office-Using Employment Growth by Sector

Workers are occupying offices more frequently in Texas, as well. Of the 10 markets sampled by Kastle’s Back to Work Barometer, Austin (63.6%), Houston (60.9%) and Dallas (53.7%) were the only three with office utilization above 50% during the week ending April 5th. 

Trends & Industry News: Conversions Become a Reality 

With housing in short supply and many office buildings sitting vacant, conversions appear to be an attractive opportunity for many owners and investors. While conversions have become more common as of late, though, they will likely not be the answer to the nation’s housing shortage. 

Conversion projects are underway in an array of markets. In Dallas, five buildings are currently being converted, bringing an estimated 1,500 units to the market within the next few years. The McGraw-Hill building in midtown Manhattan will convert more than 20 floors into apartments beginning this summer. Washington, D.C., has been the most active conversion market, with a reported 2.5 million square feet earmarked. Yet D.C. added only 1,147 units from office conversions between 2020 and 2021, according to a recent analysis by RentCafe. 

Many challenges arise in converting an office building to residential. For one, the building needs to be well located, not only in an area zoned for residential but within a neighborhood where people want to live. The configuration of the building is also important — floor plates can be too large; ceilings can be too high; HVAC systems can be ill-suited for residential. Some developers have looked to add amenities, such as storage units or gyms, in the center of the building to solve floor plate issues, but that reduces rentable space.  

Even when an office can check all of these boxes, conversions are expensive, and for an investor to profit, a majority of converted units have become luxury multifamily or condos. Distressed offices selling at bargain prices may allow previously unfeasible projects to pencil out, but many projects will still need further support to become reality, according to office real estate outlooks.

For office-to-residential conversions to be more than just a niche opportunity, government incentives will be needed to make more projects viable. Some places have already begun to address this. California’s 2023 budget allocates $400 million in grants for conversions, and the governor signed a new law that will help ease zoning issues. Baltimore recently reauthorized a tax credit that incentivizes conversions. Chicago solicited bids from developers to convert offices in the city’s LaSalle Street Corridor into housing and has recently begun selecting proposals.  

While it can be expensive to provide incentives for developers to convert vacant offices into housing, doing nothing while property values fall could also be costly. A large share of many local governments’ budgets comes from property taxes on commercial real estate, and declining office building values could wreak havoc on collections. 

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 has 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.  

Year-to-date metrics and data include the time period between January 1 of the current year through the month prior to publishing the report.    

Market boundaries in the CommercialEdge office report coincide with the ones defined by the CommercialEdge Markets Map and may differ from regional boundaries defined by other sources.