U.S. Office Market Closes 2023 With $34 Billion in Sales, 60% Below the Volume Recorded in 2022

Key Takeaways: 

• The average U.S. office listing rate stood at $37.64 per square foot, down 1.4% year-over-year   
• Up 180 basis points over year-ago figures, the national vacancy rate reached 18.3% at the end of December 
• There were 96.9 million square feet of office space under construction, accounting for 1.4% of existing stock  
• Office sales totaled $33.8 billion through 2023, with assets trading at $196 per square foot  
• San Francisco asking rents fell 7.8% year-over-year in December to an average of $61.91 per square foot 
• Chicago recorded the largest sales volume in the Midwest in 2023, totaling $1.14 billion  
• With 5.4% of its stock under construction, Austin continued to lead development in the South 
• Manhattan’s average sale price per square foot remained the highest nationwide, reaching $783 in 2023 

Trends & Industry News: Another Precarious Year for Office 

The office sector has traveled a rocky road since the pandemic, and 2024 will likely be another painful year. However, this year will likely bring the sector closer to an eventual post-pandemic status quo, our latest U.S. office market report projects. 

In 2024, we anticipate office utilization rates will slowly creep up, even if a full-scale return will never materialize. Return-to-office mandates have been more common in recent quarters, with large firms such as Amazon, Meta and Zoom announcing policies around working in the office.  

Yet even among firms that have moved to require in-office attendance, most are embracing hybrid work schedules and downsizing office footprints. Many companies are settling around two to three days a week of in-person work, and we anticipate that the physical occupancy rates will not see a major uptick from last year. We also expect the effect of hybrid and remote work will continue to decrease the prevalence of long-term fixed leases, with flexibility remaining important to tenants. 

In 2024, we expect an acceleration of less desirable office buildings being removed from the marketplace.

Peter Kolaczynski, Director, CommercialEdge

So far, there hasn’t been a wave of foreclosures, but we anticipate distress on these buildings to ramp up at varying rates between markets, submarkets and property quality. Loan extensions, workouts, defaults and foreclosures will all be more common this year. According to office real estate outlooks, the direction of interest rates will be one of the most significant determinants of the level of distress and delinquencies. 

While interest rates are still the biggest unknown in commercial real estate, it appears that increases are likely finished for the time being. This year should see an increased number of transactions as expectations are realigned and the bid-ask gap narrows due to a stabilizing cost of capital. While the number of transactions will increase, the average sale price of an office property will likely decrease for the third year in a row, our U.S. office market report anticipates. Office investors must have an appetite for risk, but discounts on attractive opportunities will be available. 

We anticipate the pace of office conversions to hold steady at 2023 levels. Turning vacant office buildings into residential space has been an attractive fix for the problems the pandemic created, but one that still has many roadblocks. The White House recently made financing for conversions available through a variety of sources but notably provided no net new funding, only opening up existing programs to conversion projects. 

Listing Rates and Vacancy: Office Occupancy Rates and Rents Continue Decline 

The national average full-service equivalent listing rate was $37.64 per square foot in December, according to our U.S. office market report, a decrease of 1.4% year-over-year and down nine cents over the previous month. 

Listing rates across A and A+ office spaces stood at $46.10 per square foot, down 1.3% over year-ago figures. At the same time, Class B office rates increased 20 basis points to $30.30 per square foot, while rates for Class C spaces increased 90 basis points to $22.95 year-over-year in December. 

Top Listings by Metro Area: December 2023 

Location-wise, only suburban assets registered growth, rising 80 basis points year-over-year to $30.60 per square foot. In contrast, listing rates for CBD and urban offices fell 6.2% and 1% over year-ago figures to $48.40 per square foot and $43.99 per square foot, respectively. 

The U.S. office vacancy rate was 18.3% in December, an increase of 180 basis points year-over-year. Office occupancy rates remained the lowest within CBDs, where vacant spaces accounted for 18.5% of stock in December. At the same time, urban (17.9%) and suburban (18.2%) office assets registered vacancy rates just below the national average. 

On an annual basis, Dallas-Fort Worth has witnessed a 170 basis points increase in vacancy rates and a more than six percent decline in the average listing rate. The rise in vacancies comes despite substantial job growth, particularly in the Financial Activities sector. The metro, recognized as a banking hub, has seen notable growth in this sector, adding over 17,000 financial jobs year-over-year (4.7%) in November. Reflecting market dynamics, Bank of America recently signed a 238,000-square-foot lease at Parkside, a forthcoming property in Uptown, downsizing from their namesake tower where they occupied 500,000 square feet. 

Supply: Construction Starts Fall 35% in 2023 Compared to 2022 Figures 

Nationally, 96.9 million square feet of office space was under construction as of December, representing 1.4% of existing stock. 

Including owner-occupied properties, the office projects that broke ground in 2023 totaled 40.6 million square feet. This marked a decrease of over 35% from the previous year (2022) and an even more pronounced decline compared to the pre-pandemic years. More specifically, in 2018, construction began on 80.8 million square feet of office space, while that number in 2019 was 98.5 million square feet. 

Our office real estate outlook predicts that starts will slide even further in 2024 as construction loans become even harder to come by and U.S. office vacancy rates tick further up. 

Office Space Under Construction (Million Sq. Ft.) 

Austin exemplifies the slowdown in starts. After being one of the hottest office markets in the country for the first few years of this decade, Austin slowed considerably in 2023. Around 9.2 million square feet of space started construction between 2020 and 2022, whereas in 2023, there were only 910,499 square feet of starts in the market, and much of that was in two buildings that will be added to the Texas Capitol Complex.  

Transactions: Spread Narrows Between Class A and B Assets 

The U.S. office market has logged $33.8 billion in office sales for 2023, at a yearly average of $196 per square foot. This is well below the investment volume recorded in 2022, when office deals amounted to $83.6 billion, with properties trading at an average of $280 per square foot.  

2023 Year-to-Date Sales (Millions) 

Prices fell for all types of offices, but top properties have seen bigger declines than mid-tier offices. In 2023, the average sale price of a building classified as A+ or A fell 21.1% year-over-year to $390 per foot. Class B properties fell 8.5% in the year to $278. The spread between the average sale price of Class A+/A properties and Class B ($112 per foot) is one of the smallest ever tracked by our databases. 

Western Markets: Vacancy Rates Continue Steady Climb in the Region 

In 2023, leading office markets in the western U.S. concluded the year with some of the highest vacancy rates in the country, consistent with the trends observed throughout the year. For instance, San Francisco ended December with a 23.6% vacancy rate, ranking third in the nation behind Detroit (25%) and Houston (24%). Seattle and Denver followed San Francisco, with vacancy rates at 22.5% and 22.2%, respectively.  

The vacancy rate is projected to increase in 2024 due to anticipated expiring leases in the coming year, according to office real estate outlooks. For example, KPMG, the accounting firm, may exit its tower at 55 2nd St. in San Francisco after a two-decade occupancy, as revealed in an exclusive report by the San Francisco Chronicle. This potential move is tied to the expiration of KPMG's lease at the end of 2024.  

As office occupancy rates decline, landlords compete for tenants by offering concessions. In San Francisco, asking rents experienced a year-over-year decrease of 7.8% in December, reaching $61.91 per square foot. However, asking rates were on a downward trend in most markets in the West. For example, rents in the Bay Area fell 3% to $54.23 per square foot, while San Diego saw its rates decrease by 3.6% to $42.00 per square foot. 

West Regional Highlights  

In terms of new supply, San Diego had the largest construction pipeline in the West on a percentage-of-stock basis in December. Office projects underway accounted for 5.4% of its existing stock and encompassed 5.08 million square feet. San Francisco came next with under-construction office projects encompassing nearly 7 million square feet of space, equal to 4.4% of total stock.  

Los Angeles ended 2023 with the largest sales volume in the West, with investors closing $2.39 billion in deals. On a national scale, only Manhattan surpassed this volume, with deals totaling $2.69 billion throughout 2023. 

In the West, the Bay Area had the second-largest sales volume, with $1.3 billion in investments, followed by Denver’s $1.05 billion and Phoenix’s $1.03 billion. In contrast, Seattle and Portland reported the lowest sales volumes, with $226 million and $211 million, respectively. 

Meanwhile, San Diego, the Bay Area and San Francisco commanded the three highest sales prices in the region, averaging $363 per square foot, $339 per square foot and $322 per square foot throughout 2023. Conversely, Phoenix’s $183 per square foot average sale price was the lowest among the top western markets. 

Midwestern Markets: Chicago Closes Just Over $1 Billion in Sales in 2023  

In 2023, Chicago led the Midwest in office sales, with closed deals amounting to $1.14 billion, despite recording the lowest average sale price nationwide at just $100 per square foot. This marked a substantial decline from the $3.32 billion volume and the $186 average price per square foot recorded in 2022. 

Detroit had the lowest sales volume among Midwestern markets, totaling just $342 million, despite having a price per square foot slightly above Chicago's ($129 per square foot). On the other hand, the Twin Cities recorded the highest sales price in the region at $190 per square foot, but the market's overall sales amounted to only $499 million. 

Midwest Regional Highlights  

Furthermore, the Midwest’s major office markets continued to record some of the most affordable asking rents across the nation. In particular, Detroit had the lowest rate among the top markets at $21.34 per square foot, and the Twin Cities secured the third-lowest rate nationally at $26.04 per square foot. Meanwhile, Chicago's average asking rent of $27.35 per square foot ranked the sixth lowest in the country. 

As office-to-residential conversions gained support from government incentives in the Midwest, the new supply pipeline remained moderate in the region’s leading office markets. As of December, Chicago had 1.8 million square feet of office space under construction, constituting 0.6% of the city's existing stock. At the same time, Detroit and Minneapolis - St. Paul had 524,000 and 486,166 square feet in the pipeline, representing 0.4% of their respective stocks. 

Southern Markets: Dallas-Fort Worth Sees Occupancy Rates Slip Despite Positive Job Growth 

Miami remained the most expensive office market in the South, closing 2023 with a $46.76 per square foot average listing rate. Austin and Washington, D.C., followed with asking rents at $41.20 per square foot and $40.62 per square foot, respectively—both above the $37.64 national average. In contrast, Orlando ($23.95) and Dallas ($26.99) recorded the lowest rates in the region.

National vs. Dallas-Fort Worth Vacancy Rate 

Despite experiencing some of the most robust job growth in the office sector, Dallas-Fort Worth also saw its vacancy rate increase by 170 basis points to 20.2% year-over-year in December. The market had the second-largest construction pipeline in terms of square footage, with more than 4.8 million square feet underway as of December. 

In fact, the Dallas-Fort Worth market saw 2.2 million square feet in construction starts in 2023. In comparison, construction starts in Austin totaled 933,044 square feet in 2023, despite the market having the largest development pipeline in the Southern region, with 5.02 million square feet under construction, equal to 5.4% of its existing stock.  

South Regional Highlights  

Dallas-Fort Worth also ranked third in the U.S. for the number of coworking spaces, totaling 249 at the end of December. The market was surpassed only by Manhattan (267 spaces) and Los Angeles (268 spaces), according to a report by CoworkingCafe. The Metroplex claimed the third spot by surpassing Washington, D.C., in Q4, achieving a 3% increase in inventory over the previous quarter. 

Washington, D.C., and Dallas-Fort Worth were the leading Southern markets in terms of sales, with $2.09 billion and $1.96 billion in closed office deals, respectively. Meanwhile, Austin led the region in sale prices, with properties trading at an average of $393 per square foot. Miami and Nashville followed with average prices of $338 per square foot and $269 per square foot, respectively. 

Northeastern Markets: Manhattan Leads the U.S. in Sales in 2023, Despite Volume Falling 55% Below 2022 Levels 

Manhattan has logged the highest sales volume nationwide, with closed office deals amounting to $2.69 billion in 2023. Additionally, this Northeastern powerhouse set the highest sale price per square foot among the top 25 U.S. markets, with properties trading at an average of $783 and exceeding the $733 per square foot recorded at the end of 2022. Nonetheless, the sales volume logged in 2023 was well below the previous year’s $6 billion total.  

Boston amassed the next-largest sales volume in the Northeast, with investors closing $1.55 billion at $300 per square foot. Next was New Jersey, with a total of $1.24 billion in transactions, albeit at a price of $142 per square foot, below the $196 national average. Finally, in Philadelphia, investors closed some $542 million in sales throughout 2023 at $135 per square foot. 

Northeast Regional Highlights  

While Manhattan remained the priciest office market in the U.S., with asking rents at $70 per square foot at the end of December, the market saw rates fall 8% compared to year-ago figures. Nonetheless, as the flight-to-quality trend prevailed, the market saw several triple-digit lease deals. For instance, SL Green's One Vanderbilt secured the highest rent of the year with a $247 per square foot lease to AIMCO, according to The Real Deal. Additionally, RFR's Seagram Building recorded 12 triple-digit deals.  

Regarding development, Boston maintained its lead in the country, boasting an under-construction pipeline of 14.6 million square feet, equal to 5.9% of its existing stock. In 2023 alone, developers broke ground on roughly 2.7 million square feet of space in Boston. Nonetheless, new construction starts have slowed significantly compared to 2022, when more than 8 million square feet of space broke ground. In contrast, New Jersey had the smallest construction pipeline in the Northeast, with 1.7 million square feet of space underway as of December, accounting for 2.3% of its total stock. 

Office-Using Employment: Growth Turns Negative in Additional Markets 

In December, the office-using sectors of the job market recorded the addition of 29,000 jobs, distributed across various categories: 14,000 in Information, 13,000 in Professional and Business Services and 2,000 in Financial Services. However, on a year-over-year basis, the growth in office employment was only 0.3%. 

Among the 120 markets covered by CommercialEdge, 56 experienced a year-over-year decline in office employment. Of those that added jobs, 18 grew at less than 1%. 

Metro-level data for November, trailing the national release, indicates that the deceleration in office job growth has been more pronounced in the Northeast, Midwest, and California. Conversely, markets across the Southeast and Texas have continued to add jobs, although at lower levels than in previous years. This trend holds true for the top markets as well, with Miami, Dallas, Austin, Houston and Nashville leading in job gains, while the Bay Area, Twin Cities, Los Angeles, Chicago and San Diego have seen the most significant drops. 

Office Using Employment 

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.