Life Science Sector Cools but Still Represents Nearly One Third of Under-Construction Office Space

Key Takeaways:

• The average U.S. office listing rate stood at $37.89 per square foot, up 0.4% year-over-year
• Up 200 basis points year-over-year, the national vacancy rate reached 17.1% at the end of July
• There was 108 million square feet of office space under construction, accounting for 1.6% of exiting stock
• A total of 33.5 million square feet of life science office space was also under construction, making up 31% of the current national office pipeline
• Office sales totaled a mere $17.5 billion in the first seven months of the year, 66% lower than during the same period last year
• At 21.7% and 20.9%, respectively, San Francisco and Seattle post second- and third-highest vacancy rates among the country’s leading office markets
• With $425 million in year-to-date office sales, the Twin Cities’ sales volume surpasses leading markets like Seattle, Atlanta and Miami
• Despite decelerating pipelines, Austin and Nashville remain leading markets for office construction on a percentage-of-stock-basis
• Manhattan remains priciest market both for office rents at $70 per square foot and for office sale prices at $582 per square foot

Trends & Industry News: Life Science Sector Slows but Remains Attractive

A slowdown in venture capital funding has hit the life sciences sector in 2023, driven by rising interest rates, the collapse of Silicon Valley Bank, and general economic uncertainty. Yet, our latest U.S. office market reports continue to show that life science properties trade at a premium, the supply pipeline is robust, and the long-term outlook remains positive.

In the previous decade, life science comprised less than 5% of all office construction. In the last two years, it has accounted for more than one out of four new projects, with over 23 million square feet of lab space beginning construction since 2022. The life science development boom was in full swing even before that. Since the start of 2021, 16.3 million square feet of new life science facilities have been delivered. By comparison, between 2010 and 2020, 23.9 million square feet were completed.

In the near term, a supply glut may be on the horizon. On top of the space delivered in the last few years, more than 33.5 million square feet of new life science space was under construction at the end of July, including owner-occupied properties, per the latest office real estate outlook. Yet, any risk of oversupply would be concentrated in just a few markets, as the life science sector remains clustered in select cities such as Boston, San Francisco, San Diego, Philadelphia, Houston and Seattle.

Overall, life science office market outlooks expect a continued expansion for the sector in the future, albeit not at the blistering pace seen in the last few years. Recent breakthroughs in mRNA and CRISPR will drive billions of dollars in investment from both private and public sources. A recent report from Pitchbook and the National Venture Capital Association showed that while the first half of 2023 saw the lowest amount of VC funding since 2019, investment this year will surpass any year before 2018.

“Life science is disproportionately buoying office starts across the country, especially in the traditional life science markets like Boston, San Diego and the Bay Area.”

Peter Kolaczynski, CommercialEdge Senior Manager

Life science assets maintained strong price trends too, although the impact of venture capital funding —– or lack thereof – meant that office sales activity cooled across the board in 2023, including the life science sector. After totaling more than $6 billion in 2022, lab space sales only reached $386.6 million this year through the end of July. However, the properties that have sold, have traded at an average of $770 per square foot, nearly four times higher than the $196-per-square-foot national average for all office buildings.

Sales Price Per Square Foot

Listing Rates and Vacancy: U.S. Office Vacancy Rates Rise 200 Basis Points Year-over-Year

The average full-service equivalent listing rate was $37.89 per square foot in July, according to our latest U.S. office market report. That represented a 0.4% increase over the previous year and seven cents over June 2023.

Top Listings by Metro Area: July 2023

While overall office rates ticked up just a few cents, rents for urban office spaces shot up 83 cents month-over-month, reaching $45.63 per square foot in July. CBD spaces slid 52 cents over the same period, closing the month at $48.35 per square foot, while suburban spaces remained virtually flat, ticking up a mere two cents over June figures, to $30.78 per square foot on average.

At the same time, average rates for A and A+ office spaces stood at $54.55 per square foot, up 14 cents month-over-month, while Class B assets gained seven cents month-over-month, resting at $30.44 per square foot at the end of July. Interestingly, data from the latest commercial office market report showed that Class C office spaces logged the sharpest increase in July, rising 50 cents to close the month at $23.54 per square foot.

Price Per Square Foot by Asset Class

Meanwhile, the July national vacancy rate was 17.1%, marking a 200-basis-point year-over-year increase. Vacancies have increased everywhere since the onset of the pandemic, especially in the largest office markets in the U.S., with the biggest jumps in tech markets. For example, San Francisco’s vacancy rate grew 370 basis points over the last year, reaching 21.68% in July. Only Houston’s 23.21% rate was higher. Two additional U.S. office markets closed July with more than one-fifth of their office stock vacant: Seattle at 20.9% and Austin at 20.53%.

Supply: Life Science Sector Fuels 31% of U.S. Office Starts

Nationally, 108 million square feet of office space was under construction at the end of July, representing 1.6% of the existing stock as construction pipelines continue to shrink. Year-to-date, only 27.4 million square feet have been delivered, while the equivalent of an additional 3.7% are in the planning stages. Considering how much new office starts have decelerated in 2023, it remains to be seen how many of these projects will make their way from the drawing board to the construction site.

Higher interest rates and entrenched remote work have combined to slow new office supply, even in markets where developers were bullish coming out of the pandemic. Only 16 million square feet of new office space started construction through July, down from 34 million in the same period in 2022.

Office Space Under Construction (Million Sq. Ft)

Despite significantly lower volumes of office starts compared to previous years, the life science industry continues to grow at an accelerated pace, fueling much of the construction in the largest office markets in the U.S. Specifically, of the 108 million square feet of office space under construction, 33.5 million square feet were made up of life science projects, `our latest office real estate outlook found. Although there is some concern of oversupply, that risk would target only the handful of markets where the industry is clustered.

So, any potential increases in office vacancy rates by city as a result of life science supply excess would target the markets with the largest volumes of ongoing lab space construction: Boston (12.4 million square feet), San Francisco (5.6 million), San Diego (4.5 million), Philadelphia (2.2 million), Houston (1.4 million) and Seattle (1.1 million).

Transactions: July Year-to-Date Sales Reach Only 34% of Year-Ago Volumes

Our most recent office market outlook found that $17.5 billion in office transactions have been recorded through the first seven months of the year, with properties trading at an average of $196 per square foot. To put the office sector’s slowdown into sharp view, sales for the first seven months of 2022 totaled $51.9 billion, meaning 2023 office sales contracted 66%. Additionally, while July 2022 alone closed $8.2 billion in office deals, July 2023 traded a mere $2.7 billion — just 33% of the transaction volume registered in last year’s same period.

Year-to-Date Sales (Millions)

At the market level, Manhattan remained far ahead of the pack in terms of sales volumes, totaling $1.55 billion in the first seven months of the year. Only Boston and Los Angeles managed to join Manhattan in the $1–billion-and-over category with $1.17 billion and $1.2 billion, respectively. By comparison, at the end of July 2022, the Bay Area, Boston and Manhattan had surpassed $3 billion in office sales each, with a further five markets closing more than $2 billion in office deals and an additional nine markets had traded in excess of $1 billion in office assets.  

Western Markets: San Francisco Vacancies Spike 370 BPS, Seattle Vacancies Surge 565 BPS in Just 12 Months

Vacancies have increased everywhere since the onset of the pandemic, with the biggest jumps in tech markets. San Francisco’s vacancy rate grew 367 basis points over the last year to sit at 21.68%. A convergence of factors led to San Francisco’s current troubles. COVID-19 hit it early and hard in 2020, leading to strict lockdowns.

The market’s tech firms were well-suited to permanently embracing remote or hybrid setups, and the tech contraction that started in late 2022 halted business formation and new office demand.  However, the market is used to boom-and-bust cycles, and generative AI could be the next boom that helps the market recover, during the second half of this decade.

Further up north on the western seaboard, the tech scene has suffered significant layoffs in Seattle, having lost more than 10,000 (-7.0%) information workers in the last year. Amazon, which is headquartered in the city, has laid off 27,000 workers since last November. While not all impacted workers were located in the market, Seattle’s labor market took the brunt of the damage.

Other tech companies headquartered there have seen large-scale layoffs in the past 12 months. Microsoft laid off 10,000 late last year and then another 1,000 this summer, while Zillow laid off 2,000 in November.

As such, it’s not really surprising that Seattle reached a vacancy rate of 20.90% – the third-highest office vacancy rate by city – having shot up 565 basis points over the past 12 months. Meanwhile, the fellow Pacific Northwest hub of Portland posted one of the lowest vacancy rates among leading western markets at 15.87%, followed by the life science hub of San Diego at 16.04%.

Regardless of its quickly rising vacancies, San Francisco still commanded the second highest asking rents in the nation at $64.06 per square foot, followed by the Bay Area’s $53.53 per square foot. San Diego ranked as the fifth-priciest market with a $46.85 asking rate — narrowly surpassed by Miami’s $47 per square foot – with Los Angeles’ $42.75 per square foot rounding out the cohort of pricey western office markets.

West Regional Highlights

Los Angeles, however, stood out with the second-largest sales volume nationwide at $1.2 billion, with Phoenix claiming #9 with $587 million. On the other end of the spectrum, Portland and Seattle were two of just three markets where office sales stayed south of $100 million, totaling $88 million and $73 million, respectively.

Meanwhile San Francisco, San Diego and the Bay Area commanded three of the five highest sales prices nationally, averaging $464 per square foot, $398 per square foot and $358 per square foot over the first seven months of the year. Conversely, Denver’s $193 per square foot average sale price was the lowest among the top western markets.

Midwestern Markets: Minneapolis – St. Paul Sales Volume Overtakes Seattle, Atlanta and San Francisco Totals

Despite posting the lowest year-to-date price per square foot among the largest U.S. office markets at just $107 per square foot, Chicago nonetheless reached one of the highest sales volumes nationwide. Specifically, the Midwestern powerhouse totaled $658 million in office sales since the start of the year — the seventh-largest office sales volume in the country.

While Chicago’s average sale price dropped $59 dollars year-over-year, the Minneapolis – St. Paul market surged $102 over the same period. So, while the average sale price in July 2022 stood at $130 per square foot, in July 2023, the Twin Cities reached $232 per square foot.

Not only that, but the Twin Cities’ $425 million year-to-date sales volume actually surpassed the sales volumes of leading markets such as Seattle, Denver, Atlanta, San Francisco and Miami. For context, the latter three had more than $1 billion in sales this time last year, while the former two had already gone north of $2 billion.

Midwest Regional Highlights

In terms of asking rents, the Midwest’s top two office markets remained among the most affordable: Only Orlando’s $24.71 per square foot rent rate was lower than the Twin Cities’ $27.21 per square foot. Chicago’s $27.54 average was slightly higher than Dallas – Fort Worth rates, but it was still the fourth most affordable market nationwide.

Chicago and the Twin Cities also had two of the four lowest construction pipelines on a percentage-of-stock basis at 0.8% and 0.5%, respectively. On a square footage basis, Chicago fared somewhat better with its 2.33-million-square-foot pipeline, but the Twin Cities’ 546 million square feet was the second lowest in the U.S.

Southern Markets: New Supply Pipeline Slows in Nashville but Ongoing Projects Will Still Deliver Large Volumes of Office Space

As construction starts dropped across the country’s largest office markets (and beyond), Nashville was no exception to the slowdown in office starts: Its once-robust pipeline has slowed to a crawl in the past year. Only three projects totaling 509,000 square feet have started construction in the last 12 months, after more than 3.2 million square feet started in the 18 months between the beginning of 2021 and the middle of 2022.

There are still many projects in the market under construction, however. On a percentage-of-stock basis, Nashville has one of the most robust under-construction pipelines in the country, with the 3.3 million square feet of new supply being built representing 5.8% of existing stock, making this the second-strongest pipeline nationwide.

Office Space Under Construction & Planned (% of stock)

The #1 strongest pipeline on a percentage-of-stock basis was also claimed by the southern U.S., with Austin’s 6.22 million square feet representing 6.9% of its built office stock. When considering planned projects as well, the two markets continue to lead office development, with Austin’s total representing more than a quarter of its existing stock, while Nashville could be looking at a 15.3% overall increase. Considering the sluggish groundbreaking activity in Music City, Nashville’s planned stock may very well materialize in a limited capacity.

Meanwhile, the Dallas – Fort Worth area and Washington, D.C. have shovels in the ground for around 4.5 million square feet of office space, still among the more robust markets in terms of development. Conversely, Orlando’s 1.17 million square feet were among the weaker construction pipelines, with Tampa at the very bottom with a mere 445,000 square feet.  

Leading southern markets claimed five of the seven smallest sales volumes among the country’s top 25 markets: Orlando was at the bottom here as well, with just $65 million in office sales so far this year. At the same time, Washington, D.C. had the fifth-largest sales volume nationwide at $889 million, followed by Houston’s $747 million. Houston managed this feat despite posting the second-lowest price per square foot among the largest U.S. office markets at just $124 per square foot.

South Regional Highlights

In terms of asking rents, Orlando’s $24.71 per square foot was the most affordable among the 25 markets analyzed in our U.S. office market report. Conversely, Miami’s $47 per square foot asking rate was the fourth highest in the U.S., whereas Tampa and Orlando had the lowest vacancy rates at 14.36% and 15.45%, respectively.  Meanwhile, Austin and Houston were two of the four markets in the country, where office occupancy rates were under 80%. Specifically, Austin’s office vacancy rate stood at 20.53%, while Houston closed July at 23.21%

Northeastern Markets: Manhattan Sale Prices More Than Halved in Just Two Years

Manhattan led the nation in sales volume in 2023, but average sale prices have fallen substantially during the last two years, from $1,172 per square foot in 2021 to $582 per square foot in 2023. Manhattan’s 850 Third Ave. epitomizes the drop in the city’s office prices: After purchasing it for $422 million ($688 per square foot) in 2019, The Chetrit Group sold the property to HPS Investment Partners, its refinancing lender in 2021, for $266 million ($433 per square foot).

Despite that dramatic drop, Manhattan remained the nation’s office price leader by a large margin – $118 ahead of the second-priciest office market of San Francisco. And although Boston’s year-to-date sale price was surpassed by the fellow life science hubs San Francisco, San Diego and the Bay Area, its $323 per square foot price was still one of the most expensive among the country’s 25 leading office markets. Meanwhile, New Jersey stood at the other end of the spectrum at $140 per square foot, for the third-lowest sale price in the country.

Northeast Regional Highlights

New Jersey’s 17.03% and Manhattan’s 17.43% vacancy rates were on par with markets such as Nashville (17.48%) and the Twin Cities (17.45%). In terms of asking rents, Manhattan still commanded the highest prices at $70 per square foot, ticking down 2.14% year-over-year, while Philadelphia ($30.68 per square foot) and New Jersey ($34.31 per square foot) stayed in the ballpark of Atlanta, Denver and Houston.

Boston, of course, remained the top market for office construction with 13.9 million square feet of space, of which $12.4 million were represented by life science projects. And while Philadelphia’s 3 million-square-foot development pipeline was far more modest, life science builds represented the majority of development here, accounting for 2.2 million square feet.

And while Manhattan’s 7.43 million square feet represented the second-largest construction pipeline among the top 25 office markets in the country, Brooklyn’s 1.08 million was among the lowest. However, on a percentage-of-stock basis, Brooklyn’s pipeline equaled 3% of its existing stock – one of the top figures in July.

Office-Using Employment: Tech Layoffs Slow but Remain Prevalent in Top Markets

Office-using sectors of the labor market lost 1,000 jobs in the month of July, according to the Bureau of Labor Statistics. This was the first decline in office jobs since April 2020. Financial activities added 20,000 jobs, while professional and business services lost 8,000 and the information sector was reduced by 12,000. The information sector has now lost 46,000 jobs so far this year. The layoffs that hit the sector last winter have slowed, but they remain prevalent in 2023.

Office-Using Employment Growth by Sector

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.