Weak Demand, Still-Rising Vacancies Predict Downward Trend in Office Valuations   

Key Takeaways: 

• The average U.S. office listing rate stood at $37.35 per square foot, falling 1.8% year-over-year
• Up 130 basis points year-over-year, the national vacancy rate was 18% in January  
• Under-construction office space reached 97.2 million square feet nationwide, accounting for 1.4% of the total stock 
• Office sales amounted to $1.5 billion through January, with assets trading at $195 per square foot
• San Francisco asking rents fell 8.7% year-over-year in January to an average of per square foot
• Chicago, the Twin Cities and Detroit remained among the most affordable office markets in terms of asking rents
• Austin had the largest supply pipeline in the South, with 4.9 million square feet under construction
• Manhattan asking rents fell by nearly 10% year-over-year but remained highest in the nation at per square foot

The office real estate sector is currently facing steep discounts in asset values due to post-pandemic effects and rising interest rates, with average property values down by at least 25%, according to the latest U.S. office market report.

The downward trend in office valuation is more pronounced in older and less ideally located buildings. Over 20% of office properties sold since the start of 2023 have fetched lower prices than their previous sales. CBD offices have been hit the hardest by the changes wrought by the pandemic, with 35% of properties trading at a lower sale price last year. For example, in Washington, D.C., a 13-story building with ground-floor retail sold for $18.2 million in 2023, down 70% from its 2017 price tag of $61.8 million. At the same time, only 21% of properties sold in the suburbs recorded a decline in value.

The lack of transactional volume makes comp identification more difficult, but lower-end buildings not in prime locations are suffering and we expect that trend to only accelerate.

Peter Kolaczynski, Director, CommercialEdge

The office market outlook for 2024 suggests an increase in these discounted sales, driven by high rates and reduced demand. The market is adjusting to these challenges, with a noticeable shift in the bid-ask gap and an increase in loan defaults, hinting at continued upheaval in the sector.

Listing Rates and Vacancy: U.S. Office Vacancy Rates Rise 130 Basis Points Year-over-Year

The national average full-service equivalent listing rate was $37.35 per square foot in January, a decrease of 1.8% year-over-year and down 29 cents from the previous month, our latest U.S. office market report reveals.

Top Listings by Metro Area: January 2024

The average rates for A and A+ office spaces have decreased by 2% from last year, currently at $45.78 per square foot. Class B office rates have inched up by 0.4% to $30.22 per square foot, and Class C properties also saw a notable increase of 5.7% to $23.23 year-over-year in January.

Rents for suburban properties have seen a slight uptick, up 0.3% to $30.56 per square foot year-over-year. Meanwhile, CBD office spaces have dropped 7.3% to $47.70 per square foot, while urban offices fell by 0.5% to $43.53 per square foot year-over-year in January.

At the same time, the national vacancy rate was 18.0% in January, an increase of 130 basis points year-over-year. At least 18 out of the top 25 markets recorded an uptick in vacancies over the previous year. Detroit led with a 550-basis-point increase in office vacancy rates, sitting at 25.4% at the end of January. Western tech markets also continued to see low office occupancy rates, with San Francisco’s office occupancy dropping 490 basis points over year-ago figures.

Supply: Life Science Sector Continues to Fuel U.S. Office Development

Nationally, 97.2 million square feet of office space were under construction at the end of January, representing 1.4% of existing stock. While total office starts have fallen precipitously since the pandemic began, life science comprises a growing share of office development.

Office Space Under Construction (Million Sq. Ft.)

In 2023, life science projects made up 27.8% of all new office construction, totaling 11.5 million square feet. This is an increase from the 26.9% encompassing 17.3 million square feet in 2022 and a significant jump from 7.3% in 2019, which saw 7.2 million square feet of life science construction starts.

While remote work and turmoil in the tech sector have wreaked havoc on offices in CBDs and urban submarkets, life science development continues to thrive in outlying portions of San Francisco. For example, life science developer IQHQ started ELCO Yards in Redwood City last year, a facility that will offer 590,000 square feet of lab space in a mixed-use development.

Transactions: Silicon Valley Nets Largest Sale Year-to-Date

The U.S. office market recorded $1.5 billion in office transactions through the end of January, with properties trading at an average of $195 per square foot.

Despite layoffs and stagnation in the tech sector, some firms have expanded, helping prop up activity in Silicon Valley. The Bay Area began the year with the nation’s highest sales volume, led by cybersecurity firm Fortinet’s $192 million acquisition of a campus in Santa Clara from Texas Instruments, which is leaving that building and moving to another space in the same city.

2024 Year-to-Date Sales (Millions)

Western Markets: Asking Rents Continue Downward Trend in Leading California Markets

The Western region saw a continued uptick in U.S. office vacancy rates in January, fueled by the persistent challenges associated with remote and hybrid work options. San Francisco experienced the sharpest year-over-year increase in vacancy rates, rising 490 basis points to 23.7% — the third-highest rate among the largest U.S. office markets, exceeded only by Houston’s 24.3% and Detroit’s 25.4% rate.

Seattle and Denver had the next-highest vacancy rates in the nation, also experiencing some of the sharpest upticks in available space. Specifically, office vacancies in Seattle rose 450 basis points to 23% year-over-year in January, while Denver saw its rates grow by 390 basis points to 22.2% over the same period.

Although the West continues to post some of the highest lease rates in the U.S., several metro areas within this region have experienced declines in asking rents. San Francisco's listing rates dropped by 8.7% year-over-year to $61.55 per square foot. Similarly, the Bay Area experienced a 4.6% decrease, with rents averaging $54.45 per square foot. In San Diego, asking rates fell by 2% to $42.95 per square foot, and Los Angeles saw a 2.7% decrease, with rates at $41.48 per square foot.

West Regional Highlights

While San Francisco’s office market continues to experience turmoil amid tech sector woes, the life science sector continues to drive development in the metro. Since July 2023, the market has recorded 1.6 million square feet of construction starts on projects that contain at least some life science components, all located along the peninsula between San Francisco and Silicon Valley.

Overall, San Francisco had around 6.6 million square feet of office space underway as of January — the largest pipeline in the region in terms of square footage — accounting for 4.2% of its existing stock. Considering planned projects as well, the market is set to expand its footprint by 13.2%. In contrast, Portland had the lowest office pipeline in terms of square footage, with only 354,450 square feet of space under construction, equal to 0.6% of the metro’s total stock.

Following a year marked by slow office transactions, sales activity remained slow through January. So far, the Bay Area logged $259 million in transactions, followed by San Diego and Los Angeles, with $142 million and $71 million in closed office deals, respectively.

Midwestern Markets: Detroit Records Largest Vacancy Rate Nationwide at 25.4%

Following trends seen in 2023, the Midwest office market remained one of the most sluggish nationwide, with key fundamentals in the region’s leading metros changing little overall. In January, asking rents in Chicago stood at $27.73 per square foot, $9.62 below the national rate.

At the same time, Minneapolis-St. Paul closed January at $26.03 per square foot, whereas Detroit posted $21.68 per square foot — the lowest rate among the top 25 U.S. office markets. Overall, these listing rates continued to be among the six lowest in the country, along with Orlando’s $23.93 per square foot, Dallas-Fort Worth’s $26.49 per square foot and Phoenix’s $27.75 per square foot.

Midwest Regional Highlights

Construction activity in the Midwest also remained slow. The Twin Cities had the smallest pipeline, with 486,166 square feet underway, making up 0.4% of the existing inventory. Detroit saw a similar level of activity, with approximately 524,000 square feet in development, also equal to 0.4% of its existing stock. Chicago experienced a slightly more robust construction pipeline, with 1.8 million square feet underway, accounting for 0.6% of its total inventory.

Southern Markets: Austin Remains One of the Priciest Markets in the South Amid Rising Vacancies

Austin has emerged as one of the fastest-growing office markets in recent years. Since 2017, the metro has seen a 54% increase in office-related jobs, adding 147,000 positions. This surge in demand prompted developers to rapidly increase office space, delivering 23.8 million square feet (21.3% of existing stock) since 2017, including 11.1 million square feet in the last three years alone.

However, the influx of new office space, a slowdown in office job growth and the rise of remote work have created a challenging landscape for offices in Austin. The metro’s vacancy rate has climbed to 22%, rising 290 basis points year-over-year in January.

At the same time, rents decreased by 0.4% year-over-year to $41.15 per square foot. Nonetheless, Austin remained the second-priciest metro in the South, following Miami’s $45.96 per square foot and slightly outpacing Washington, D.C.’s $40.40 per square foot rate.

South Regional Highlights

As of January, Austin also had the largest development pipeline in the South, with 4.9 million square feet of office space under construction, accounting for 5.3% of its existing inventory. In contrast, Tampa had the smallest pipeline, with only 440,323 square feet under development.

The Texas capital also logged the largest sales volume in the South through January, with investors closing $112 million in office deals. This broke down to an average price of $471 per square foot. Dallas had the second-largest sales volume in the region at $109 million, with properties trading at an average sale price of $134 per square foot.

Northeastern Markets: Manhattan Asking Rents Down 9.9% Year-over-Year

As a major life science hub, Boston has experienced higher development activity than other Northeastern markets in the past few years. As of January, the metro had 14.5 million square feet of office space under construction, accounting for 5.8% of its inventory. Notably, nearly 11 million square feet of the projects are life science facilities, with about 7.6 million square feet expected to come online in 2024.

In terms of square footage, Manhattan had the second-largest construction pipeline, with roughly 3 million square feet of office space under development, equal to 0.7% of existing stock. Manhattan’s development pipeline has significantly slowed compared to January last year, when the under-construction pipeline encompassed around 9.9 million square feet of space.

Northeast Regional Highlights

Among the 25 largest office markets in the U.S., Manhattan remained the top for office asking rates at $68.27 per square foot despite lease rates falling 9.9% over year-ago figures. Although the decline in rates is narrowing the gap between Manhattan and high-priced California markets, Manhattan's asking rents remained almost $7 higher than San Francisco’s $61.55 per square foot rate.

In the Northeast, Boston had the next-highest lease rate, coming in at $45.71 per square foot, followed by New Jersey’s $34.41 per square foot and Philadelphia’s $31.11 per square foot rate.

In line with national trends, sales activity remained muted across leading markets in the Northeast. Through January, New Jersey logged the largest volume, with just $104 million in transactions, followed by Manhattan’s $51 million and Boston’s $36 million volume.

Office-Using Employment: Office Employment Growth Slows in 2023

While the overall labor market continues to beat expectations, office-using sectors are lagging behind. Total non-farm employment grew 1.9% nationally year-over-year in January while office-using sectors increased just 0.8%. Emerging from the pandemic, office-using sectors outpaced overall job growth for 18 consecutive months, from June 2021 through November 2022. Since then, however, office-using sectors have grown more slowly than overall employment every single month.

Office Using Employment

The slowdown in office job growth has been widespread geographically. Metro-level data for December, which trails the national release, shows that office-using employment levels declined last year in 56 of the 120 markets covered by CommercialEdge. Of the top 25 markets, Miami was the fastest growing, with employment in office-using sectors increasing by 4.4%. In 2022, only 15 markets ended the year with office job losses, and six of the top 25 markets grew at a rate higher than 5% year-over-year.

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.