Maturing Loans Point to Increased Uncertainty in the Office Sector 

Key Takeaways: 

• The average U.S. office listing rate stood at $38.28, down 1.6% year-over-year 
• Up 70 basis points year-over-year, the national office vacancy rate rested at 16.5% 
• Under-construction office space totaled 123.5 million square feet at the end of the month, with another 271.3 million square feet in the planning stages   
• Office sales totaled $4.6 billion year-to-date through February, with assets trading at $232 per square foot 
• San Francisco recorded the largest sales volume in the West with $308 million in closed deals 
• Asking rents in Chicago stood at $28.23 per square foot, $10.05 below the national rate  
• Houston, Atlanta and Austin posted the highest vacancy rates, all north of 20% 
• Manhattan recorded the highest average sale price at $1,507 per square foot 

With interest rates trending upward, the economy slowing and demand for office space remaining muted, owners will continue to face difficulties in the foreseeable future, as the CommercialEdge U.S. office market report reveals. This is especially true for office owners with loans that are maturing in the next three years, which accounts for more than 9,500 buildings and 17% of all office stock, according to CommercialEdge.  

However, loans are not maturing equally across markets, and some places will see more maturities than others in the near-term. Among the largest office markets in the U.S., three — Portland, Atlanta and Denver — have more than 10% of office stock subject to a maturing loan in 2023, and two others — Chicago and Los Angeles — have more than 7% of office stock maturing this year.  

The timing is difficult for buildings that have loan maturities on the horizon. However, this won’t be just a 2023 problem but something we will monitor closely for the next three-plus years.

Peter Kolaczynski, CommercialEdge Senior Manage

Some of these markets also have more sluggish fundamentals, with rising vacancies and more moderate asking rates, adding more uncertainty for owners. With weak demand and the rising cost of borrowing, refinancing offices will be challenging unless they include solid leases with high-quality tenants.  

Office types that were less subject to the pandemic-driven changes, such as life sciences, are better positioned to weather the storm. As a result, sales activity is expected to be fueled by lab spaces, especially in large hubs such as Boston, the Bay Area and San Diego.  

Listing Rates and Vacancy: Rental Rates Remain Steady Despite Rising Vacancies 

The national average full-service equivalent listing rate for office space was $38.28 per square foot in February, according to CommercialEdge, down 1.6% year-over year. At the same time, the national office vacancy rate in the month was 16.5%, up 70 basis points over February 2022. 

Demand for office space has declined since the pandemic, leading to U.S. office vacancy rates rising steadily over the last three years. However, we have yet to see average listing rates fall in response. 

One reason for this could be that the average listing rates can reflect the quality of space listed as much as the underlying fundamentals. All types of space, from A+ to C, are being listed, meaning that the overall average will see little movement, the office real estate outlook indicates.

Top Listings by Metro Area: February 2023 

However, we believe that concessions play a large role in keeping listing rates steady. Owners have been offering large tenant improvement allowances and months of free rent to attract tenants to their buildings. Many landlords are wary of dropping listing rates because of the impact that doing so could have on valuations. 

Supply: Office Development Expected to Drop in Response to Weak Demand 

Nationally, there were 123.5 million square feet of new office stock under construction at the end of February, representing 1.9% of existing stock. According to the CommercialEdge U.S. office market report, an additional 271.3 million square feet were in the planning stages (4.2% of stock), although that number is likely to decrease in the future as projects are indefinitely paused or canceled in response to remote and hybrid work becoming entrenched in the economy. 

Office Space Under Construction (Million Sq. Ft) 

While many office use types are struggling with post-pandemic demand, the life science sector is not, especially in the top markets like Boston, the Bay Area and San Diego.  

In San Diego, the third-largest life science market in the country, the largest projects under construction are all delivering lab space to the market. IQHQ is building the $1.6 billion RaDD (Research and Development District) along the waterfront to attract life science companies to downtown San Diego. The mixed-use project will include five lab buildings, a general office and retail space. Nearby, The Campus at Horton Plaza is an adaptive reuse project that covers 10 acres and seven city blocks, offering the same mix of lab space, retail and office. 

Transactions: Lab Space Trades in Uncertain Climate 

CommercialEdge has recorded $4.6 billion in office transactions through the first two months of the year, with properties trading at an average of $232 per square foot. While investment has slowed in response to lowered office demand and rising interest rates, lab space is still in demand for investors. Private Equity firm TPG sold Center-Point life science campus in Waltham, Massachusetts, to CS Capital Management for $578 million, an average of $1,000 per square foot for the three buildings.

Year-to-Date Sales (Millions) 

Due to the sharp rise in interest rates, the cost of buying and refinancing properties has also increased and put downward pressure on property values. As a result, the average sale price of an office property, which fell from a national average of $299 per square foot in the fourth quarter of 2021 to $214 a year later, could decline further as prices adjust to the current environment. Falling prices may lead to new buildings becoming candidates for adaptive reuse, although such projects will still require the building to have characteristics amenable to conversion. 

Western Markets: Life Sciences Fuel San Diego Development 

As the tech pullback continued to play out, established hubs in the West continued to experience upward pressure on vacancy rates. In February, San Francisco’s vacancy rate stood at 19.15%, up 2.25% year-over-year, the highest rate in the region and the fifth highest nationwide. The sharpest increases in office vacancy rates by city, however, were recorded in Seattle and the Bay Area, up 3.26% and 2.77%, respectively. 

Despite the high vacancy rate, San Francisco remained the most expensive market in the West, with asking rents at $67.25 per square foot, followed by the Bay Area at an average of $57.10 per square foot. Only Manhattan exceeded this rate in the entire U.S., with the average rent coming in at $76.04. Rents in leading western markets were mostly on the rise over the past 12 months, with Denver and Portland being the only exceptions. Although Denver saw its rates decline by a mere 10 basis points, asking rents in Portland dropped 6.5%, stabilizing at $27.99 per square foot. 

West Regional Highlights 

Denver and Portland also have more than 10% of their office stock subject to a maturing loan in 2023, further fueling uncertainties for owners. With weak demand, high cost of capital and softening leasing rates, and without high-quality tenants, refinancing loans is expected to be challenging in these markets. 

Los Angeles is another market with a wall of office maturities on the horizon — more than 7% of the metro’s office stock is subject to a maturing loan this year, and Brookfield’s default on $784 million in loans on two office towers in downtown L.A. hints at what’s next for office owners.  

Although the numerous headwinds facing the office sector are expected to slow down sales activity, major western office markets remain attractive to investors. San Francisco recorded the largest sales volume with a total of $308 million in closed office deals, followed by Los Angeles with $154 million and Phoenix with $90 million in deals closed.  

Sales Price Per Square Foot 

When it comes to price per square foot, San Francisco still claimed the top spot in the region — and the third place nationwide — with assets trading at $566 per square foot. The Bay Area came in second with an average sale price of $492 per square foot and San Diego followed with $271 per square foot. As top life science markets, the Bay Area and San Diego will likely continue to attract more capital going forward. 

The life sciences sector also continued to fuel development activity in San Diego. The metro had more than 4.6 million square feet of office space under construction, accounting for 5% of its existing stock. The largest projects underway are all delivering lab space to the market. For instance, IQHQ is developing the $1.6 billion RaDD, a project that will include five buildings of lab space and is set to deliver early next year.  

In terms of square footage, San Francisco led development activity with more than 7.5 million square feet of office space in the pipeline, accounting for 4.9% of the local stock. Meanwhile, Portland had the smallest pipeline, with 681,714 square feet of office space under construction, which is set to increase the local inventory by 1.2%. 

Midwestern Markets: Chicago & Twin Cities Office Market Remain Sluggish 

Chicago and Minneapolis – St. Paul continued to record some of the slowest office fundamentals among the top 25 markets nationwide, with rising vacancy rates and listing rates still behind the national average. Asking rents in Chicago stood at $28.23 per square foot in February, $10.05 below the national rate.  

At the same time, asking rates in the Twin Cities closed February at $26.05, falling 0.80% year-over-year. These rates were among the five lowest in the country, accompanied by Portland’s $27.99 per square foot, Phoenix’s $27.38 per square foot and Orlando’s $24.62 per square foot.  

Chicago’s 19.2% vacancy rate was also the fourth highest nationwide, after Houston’s 22.5%, Atlanta’s 20.46%, and Austin’s 20.36% rate. Meanwhile, the Twin Cities registered a vacancy rate of 15.47%, slightly below the 16.5% national office vacancy rate. 

Midwest Regional Highlights  

With more than 7% of Chicago’s office stock subject to loan maturities this year, the market will likely face more challenges in the coming months. Year-to-date through February, office sales remained sluggish in the metro, with some $43 million in closed deals. Minneapolis – St. Paul recorded a similar amount at $40 million in transactions, with the average sale price per square foot coming in at $203.  

Between 2020 and 2021, Chicago became a hotbed for adaptive reuse projects, with more than 1,100 new apartments opened by repurposing unused buildings, according to RentCafe. With the anticipated distressed activity and recent incentives to encourage office conversions, this trend will likely continue.  

As a result, the office pipeline in Chicago continued to be moderate in February, with around 3.4 million square feet of office space underway, accounting for 1.1% of total inventory. Developers in the Twin Cities also remained tempered — the metro had the lowest pipeline nationwide, with only 676,369 square feet of office space under construction, accounting for 0.6% of total inventory. 

Southern Markets: Austin Remains the Darling of Office Developers 

Miami remained the priciest Southern office market, with asking rents coming in at $46.89 per square foot. Austin and Washington, D.C., also recorded rates in the $40 range, above the $38.28 per square foot national average. On the other end of the spectrum stood Dallas ($28.95), Tampa ($28.41) and Orlando ($24.62), with the latter recording the lowest rate among the top 25 leading U.S. office markets. 

U.S. office vacancy rates continued to rise in most markets in the South, with at least half of the 10 markets in the region recording rates above the 16.5% national average. Houston, Atlanta and Austin registered rates above 20%, leading the nation in office vacancies.  

South Regional Highlights 

Regarding sales activity, Miami claimed the top spot among leading southern markets, with office transactions totaling $332 million and assets trading at an average of $556 per square foot year-to-date through February. In terms of average sale prices, Austin followed with $323 per square foot and Washington, D.C., came in third with a price per square foot of $289. 

In some of the Southern markets, sales activity remained slow compared to the national average. However, this is not surprising given the modest fundamentals coupled with the upcoming office loan maturities in 2023 and over the next three years. For instance, Atlanta has more than 10% of its office stock subject to a maturing loan this year and, by 2025, the metro is projected to see 29.1% of office loans mature.  

New office developments continued at a fast pace in Austin, with more than 6.6 million square feet under construction, accounting for 7.5% of total inventory — the largest pipeline nationwide on a percentage-of-stock basis.  At the other end of the list stood Tampa, with an office pipeline of only 814,099 square feet, representing 1.2% of local stock. 

Northeastern Markets: Boston Records Largest Sales Volume Nationwide 

Manhattan continued to post the steepest asking rent in the U.S., closing February at $76.04 per square foot, increasing 0.39% over the previous month, U.S. office market report data shows. This is well above the second-highest rate of $67.25 recorded in San Francisco and the third-highest rate of $57.10 per square foot in the Bay Area. Most markets in the Northeast, however, registered asking rates below the national average of $38.28, with Philadelphia’s being the lowest at $31.24 per square foot.  

Office vacancies in the Northeast’s top markets remained mostly in the teens, with Brooklyn’s 18.6% the highest. Meanwhile, Manhattan’s average vacancy rate grew at the fastest rate in the region, climbing 2.87%.   

Northeast Regional Highlights 

Manhattan also stood out with the highest sale price per square foot nationwide, with assets trading at an average of $1,507 per square foot year-to-date through February. Boston registered the second-highest sale price in the nation and the region at $605 per square foot.  

In terms of sales volume, Northeastern markets also took the lead, with investors closing $666 million in office deals in Boston, $423 million in New Jersey and $351 million in Manhattan. Like San Diego and the Bay Area, Boston will likely continue to see more transaction activity thanks to its established life science market. For example, CS Capital Management has recently paid $578 million to TPG for a three-building life science campus in Waltham, Massachusetts. 

Boston also led the Northeast in terms of development. The metro had more than 13.5 million square feet of office space under construction, accounting for 5.6% of the local stock. Considering planned projects as well, Boston’s office stock is projected to increase by 11.3%. On a percentage-of-stock basis, New Jersey had the smallest pipeline in the region, with projects under construction representing 0.8% of its total inventory. 

Office-Using Employment: Tech Layoffs Continue in 2023 

Growth in office-using sectors has decelerated in the last eight months and increased by only 2.4% year-over-year in February, adding only 19,000 jobs in the month, according to the Bureau of Labor Statistics. 

One culprit behind this slowdown is the tech sector, which has been slashing payrolls in recent quarters. After a wave of layoffs among tech firms at the end of 2022, the bleeding has not stopped in the early part of 2023. Google has announced they will reduce their workforce by 12,000 in 2023, Microsoft will lay off 10,000 workers, and Salesforce and Amazon are both dropping 8,000 employees.  

Office-Using Employment Growth by Sector  

Meta laid off 11,000 late last year and reporting indicates that an equal size reduction will be coming to the company in 2023. Tech layoffs will impact San Francisco, the Bay Area and Seattle the hardest, though the pain will also be felt in markets like Austin, Manhattan and Northern Virginia, where Amazon recently paused construction of the second phase of its HQ2 in Arlington. 

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 Yardi Matrix and may differ from regional boundaries defined by other sources.