Office Utilization Plateaus at 50% to 60% of Pre-Pandemic Levels

Key Takeaways: 

• The average U.S. office listing rate stood at $37.73 per square foot, down 0.9% year-over-year  
• Up 190 basis points year-over-year, the national vacancy rate was 18.2% in November 
• Under-construction office space totaled 99.6 million square feet nationwide, accounting for 1.5% of the total stock  
• Office sales amounted to $30.1 billion through November, with assets trading at $193 per square foot  
• Vacancy rates continued to soar in the West, rising 510 basis points in San Francisco and 430 basis points in Seattle 
• At $102 per square foot, Chicago’s average sales price remained the lowest among leading office markets 
• Washington, D.C., recorded the largest sales volume in the South, closing $1.89 billion in transactions 
• Boston led the U.S. in office development, with 13.5 million square feet underway at the end of November 

Trends & Industry News: Loan Maturities Vexing Issue for Offices 

Office loan defaults are set to rise. Demand for office space is down, expenses are up and values have dropped as large numbers of loans mature over the next few years, our latest U.S. office market report reveals. 

A recent analysis of our loan data shows that nearly $150 billion of office loans are maturing by the end of next year, and more than $300 billion will mature by the end of 2026. Yet, the risk these maturing loans pose varies by location, with maturing debt generally concentrated in primary markets, urban submarkets and Class A properties. 

It’s important to understand that each loan maturation is highly unique to that property, with many variables contributing to the outcome. Given that physical occupancy rates remain surprisingly low, hovering around 50-55%, the office vacancy rate will significantly shape the end result.

Peter Kolaczynski, Director, CommercialEdge 

Eight markets account for half of all maturing loan volume through the end of 2024. Manhattan leads the way ($19.8 billion), followed by Los Angeles ($10.3 billion), Chicago ($10.1 billion), Washington D.C. ($8.6 billion), Houston ($8.1 billion), Boston ($7.9 billion), San Francisco ($6.6 billion) and Atlanta ($6.5 billion). 

In a few of these markets, the amount of loans maturing before the end of next year accounts for more than a quarter of all office loan volume. Chicago maturities represent 26.4% of all loans, Houston’s 29.7% and Atlanta’s 28.8%. Urban markets will account for $176.9 billion, or nearly 60% of loans maturing by the end of 2026. Likewise, $203.2 billion or more than two-thirds of loans maturing through 2026 serve as collateral for A or A+ properties. 

Demand for office space has partially rebounded in recent quarters, but most metrics estimate utilization has plateaued at around 50% to 60% of pre-pandemic levels. Many tenants have downsized footprints, and although some companies are taking a tougher stance on return-to-office policies, we remain a couple of years away from a post-pandemic equilibrium. 

Weakened demand has given tenants increased leverage in lease negotiations, often getting landlords to pay for improvements and amenities. Other costs, such as insurance and maintenance, have also been increasing, depleting net operating income. Consequently, delinquencies are rising. According to Trepp, 6.1% of office CMBS loans were delinquent in November, up from 1.7% in November 2022. 

Going forward, interest rates will highly influence the level of distress and delinquencies. Banks will also play a key role, involving their willingness to extend agreements and their choices about how much exposure they want to have to offices in general. Investor demand for offices remains low and is unlikely to improve in the near term, our office real estate outlook indicates. 

Listing Rates and Vacancy: Office Asking Rents and Occupancy Rates Continue to Fall 

The national average full-service equivalent listing rate was $37.73 in November, according to our U.S. office market report, a decrease of 0.9% year-over-year and down four cents over the previous month. 

The rates for A and A+ office spaces have decreased by 2.4% from last year, currently standing at $45.85 per square foot. Meanwhile, Class B office rates have inched up by 0.2% to $30.37 per square foot, and Class C spaces saw an increase of 1% to $23.29 year-over-year in November.  

Top Listings by Metro Area: November 2023 

Suburban assets have experienced the highest rent increase, rising by 1.3% year-over-year to $30.72 per square foot. At the same time, CBD offices logged a year-over-year drop of 5% to $48.35 per square foot, whereas urban office space remained level year-over-year at $44.69 per square foot. 

The national office vacancy rate was 18.2% in November, an increase of 190 basis points year-over-year. Tech markets have perhaps been hit the hardest in recent years, first by remote work and, more recently, by the industry-wide downturn that began at the end of 2022. Some of the highest U.S. office vacancy rates were recorded in San Francisco (24.2%), Seattle (22.3%) and Austin (21.2%).  

Supply: Construction Starts Fall 40% Compared to Levels Seen in the Past Two Years 

Nationally, 99.6 million square feet of office space was under construction as of November, representing 1.5% of existing stock. Life science and Sunbelt markets have the most active pipelines, but activity has eased even in those areas. 

Office starts have slowed greatly in 2023, with 36.5 million square feet starting through the end of November, our U.S. office market report reveals. This is down more than 40% from the level of starts seen through the same period in 2021 and 2022. 

Office Space Under Construction (Million Sq. Ft.) 

Among the 25 leading markets, Boston had the largest pipeline both in terms of square footage and on a percentage-of-stock basis. Here, developers broke ground on approximately 2.4 million square feet of office space since the beginning of 2023. Earlier in November, Tishman Speyer, together with Harvard University, broke ground on Enterprise Research Campus, a mixed-use life science project in Boston, scheduled for delivery in 2026.  

Transactions: Investor Demand for Offices Remains Low 

The U.S. office market has recorded $30.1 billion of office sales through November, significantly below the $80.4 billion in office transactions logged during the same period last year. The average sale price per square foot also fell from $253 per square foot in November 2022 to $193 per square foot in November 2023. 

Nationwide, Manhattan recorded the highest average sale price at $574 per square foot, followed by San Diego’s $412 per square foot and Austin’s $410 per square foot. In contrast, the lowest average sale prices were recorded in Chicago ($102 per square foot), Houston ($127 per square foot) and Detroit ($130 per square foot). 

2023 Year-to-Date Sales (Millions) 

Western Markets: Seattle Vacancy Rate Continues Upward Climb 

The shift to remote and hybrid work has led to a fundamental change in the need for office space, posing notable challenges, especially for tech markets. Unlike a typical recession, where companies abandon offices due to layoffs or bankruptcy, the current circumstances are prompting companies to shrink their office footprint while keeping their workforce intact.  

For example, after exiting or letting leases expire across millions of square feet, Microsoft reportedly will give up more than 400,000 square feet in Bellevue’s Lincoln Square North tower. As a result, Seattle’s vacancy rate continued to rise, reaching 22.3%, up 430 basis points over the previous year.  

Among western markets, Seattle's vacancy rate was surpassed only by San Francisco's rate of 24.2%, up 510 basis points year-over-year. Denver and the Bay Area also recorded vacancy rates above 20%, reaching 21% and 20.3%, respectively.  

Despite a 7.2% year-over-year decline in asking rates in November, San Francisco maintained its position as the most expensive market in the West, averaging $62.18 per square foot. The Bay Area followed with rents at $54.41 per square foot, reflecting a 2.4% decrease over the past 12 months.  

West Regional Highlights  

San Diego secured the third-highest rate in the region at $42.20 per square foot, marking a 3.5% year-over-year drop. Lastly, Los Angeles was the only other Western market with leasing rates above the national average of $37.73 per square foot, registering $41.60 per square foot. 

Meanwhile, Los Angeles retained its status as the most attractive market for investors nationwide, boasting $1.96 billion in office sales year-to-date through November. The Bay Area recorded the second-highest sales volume, closing deals totaling $1.06 billion. In contrast, Seattle and Portland reported the lowest sales volumes, with $226 million and $211 million traded, respectively. 

And while the average sale price has been dropping in nearly every market, San Diego has held steady, with prices rising slightly from $410 per square foot last year to $412 in 2023. The largest transaction so far this year was Rexford’s sale-leaseback acquisition of defense and transportation contractor Cubic Corporation’s headquarters in San Diego. In the long term, the campus will be partially redeveloped into industrial space after Cubic relocates. 

Midwestern Markets: Chicago Logs Largest Sales Volume in the Midwest 

Chicago topped the Midwest in sales, registering $992 million in closed office deals year-to-date through November. This figure marked a significant decrease from the $3.15 billion recorded during the same period last year. Additionally, the average year-to-date sale price also saw a decline, dropping from $186 per square foot in November 2022 to $102 per square foot in November 2023 — representing the lowest sale price per square foot among the 25 largest U.S. office markets. 

In terms of sale prices, Minneapolis–St. Paul took the lead in the Midwest with an average of $197 per square foot. However, its transaction volume for the year was relatively modest at just $583 million. Next, in Detroit, office deals amounted to $326 million, with assets changing hands at an average of $130 per square foot. 

Midwest Regional Highlights  

Regarding asking rents, the Midwest’s leading office markets continued to post some of the most affordable prices across the U.S. Specifically, Detroit saw the lowest rate among top markets at $21.32 per square foot, while the Twin Cities posted the third-lowest rate nationwide, at $26.34 per square foot. Meanwhile, Chicago’s average asking rent of $27.73 per square foot was the sixth-lowest nationally.  

In November, every Midwestern market analyzed in the current U.S. office market report had a development pipeline equivalent to 0.4% of their respective stock. In terms of square footage, Chicago had the largest pipeline, with 1.4 million square feet underway, followed by Detroit’s 524,000-square-foot and the Twin Cities’ 485,444-square-foot pipeline.  

Southern Markets: Dallas Leads Nation in 2023 Construction Starts 

While office starts have slowed significantly across the country in 2023, developers in Dallas-Fort Worth continued at full steam. The metroplex has led the nation in starts this year, with more than 3 million square feet of office space beginning construction (including owner-occupied properties).  

Dallas-Fort Worth developers have started construction on various projects, ranging from the 400,000-square-foot Baylor Scott & White MOB in Frisco to Wells Fargo's new campus in Las Colinas. As of November, the metroplex had 3.9 million square feet of office space under development, accounting for 1.4% of the existing inventory.  

South Regional Highlights  

At the same time, Dallas-Fort Worth also recorded one of the largest sales volumes nationwide, with $1.86 billion in transactions, slightly below Manhattan’s $1.87 billion and Washington, D.C.’s $1.89 billion volume.  

Despite maintaining its appeal to investors and being a preferred hub in the Lone Star State, Dallas-Fort Worth reported one of the lowest asking rates among the top 25 U.S. office markets at $27.64 per square foot, reflecting a 3.9% year-over-year decrease. In the South, Orlando was the only market to record a lower asking price, coming in at an average of $23.89 per square foot.  

At the other end of the spectrum, Miami posted the highest leasing rate in the South at $46.52 per square foot, despite a 6.3% decline compared to year-ago figures. Austin followed with asking rents at $41.36 per square foot, down 1% year-over-year. Washington, D.C., was the only other southern market with asking rents above the $37.73 national average, stabilizing at $40.88 per square foot after a 1.6% decline year-over-year.  

Northeastern Markets: Manhattan Claims the Highest Office Sale Price in the U.S. at $574 Per Square Foot 

In November, Manhattan maintained its position as the most expensive market for office rents, averaging $70.78 per square foot — a 5.3% decrease compared to the previous year. Despite this decline, Manhattan's asking rents still exceeded the next-highest rate, San Francisco's $62.18, by nearly $9 and surpassed the third-highest rate of $54.41 in the Bay Area by more than $16.  

In the Northeast, Boston followed Manhattan, closing the month at $45.31 per square foot. New Jersey and Philadelphia stayed in the $30 per square foot range, with New Jersey’s average stabilizing at $34.56 and Philadelphia’s at $31.98 per square foot. 

Northeast Regional Highlights  

Even with high asking rates, the upcoming maturing loans in the next three years will likely put increased pressure on leading markets in the region, according to our office real estate outlook. Manhattan holds the top position in the nation for office loans reaching maturity, with $19.77 billion due by the end of 2024 and a total of $56.69 billion in loans set to expire by the end of 2026. Boston has the next-highest volume of maturing debt in the Northeast, with $7.92 billion due by the end of 2024 and $11.80 billion due by the end of 2026, according to our latest market bulletin.  

Despite the uncertainties ahead, Manhattan secured the third-largest sales volume nationwide, totaling $1.87 billion in office deals year-to-date through November. Boston and New Jersey came next, closing $1.49 billion and $1.21 billion in transactions, respectively. Among the prominent Northeastern markets, Philadelphia reported the lowest volume at $541 million.  

In terms of sales prices, Manhattan took the lead nationwide, with properties trading at an average of $574 per square foot. Boston followed with $306 per square foot, while New Jersey and Philadelphia posted an average of $144 per square foot and $136 per square foot, respectively, below the $196 national average. 

As of November, Boston had the largest development pipeline, with 13.5 million square feet under construction, representing 5.5% of existing stock. In contrast, New Jersey had the smallest pipeline in the region, with 1.7 million square feet underway, equal to 0.9% of its existing inventory.  

Office-Using Employment: Miami Growth Decelerates 

In November, job additions in office-using sectors totaled 5,000, reflecting a modest increase of 0.4%. Examining metro-level data for October, even the most robust markets show a slowdown in office job growth. 

For instance, Miami, which has been a rapidly expanding market for office employment, recorded a 3.7% year-over-year growth in October, ranking among the top markets. However, signs of vulnerability are emerging. Despite a remarkably low unemployment rate of 1.6%, less than half the national average of 3.7%, the tight labor market in Miami provides limited room for adding office jobs through avenues other than the influx of workers and businesses.  

Office Using Employment 

Despite reported relocations into the market since the pandemic's onset, the total size of the labor force remains approximately the same as before the pandemic. Miami also has 4% of its stock under construction, suggesting potential absorption challenges if job growth continues to decelerate. 

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.