Sales Activity Remains Slow as Discounted Office Sales Jump to 30% 

Key Takeaways: 

• The average U.S. listing rate was $37.72 per square foot, falling 1.7% year-over-year 
• Up 80 basis points year-over-year, the national vacancy rate stood at 17.8% 
• Under-construction office space totaled 83.8 million square feet nationwide, while 18.5 million square feet were completed so far this year 
• Office sales amounted to $10.2 billion through May, with assets trading at $165 per square foot 
• San Diego vacancy rates rose 310 basis points year-over-year to 18.5%, while new life science deliveries are expected to put further pressure on the market 
• At $81 per square foot, Chicago’s average sales price was the lowest among leading office markets 
• Washington, D.C., recorded the largest sales volume in the U.S. year-to-date as of May, totaling $999 million 
• Year-to-date through May, the average sale price in Manhattan was $300 per square foot, down 66% from 2023

Trends & Industry News

Distress Slowly Playing Out  

After years of turbulence, the future of the office sector is now clearer than it has been for some time. Investors who once adopted a wait-and-see approach are gradually coming to terms with the new realities of valuations and office utilization, our latest U.S. office market report reveals. 

Most metrics that track office utilization have plateaued in the last year. Kastle’s closely tracked Back to Work Barometer has not seen any significant recent increases in the top 10 surveyed markets. Remote and hybrid work have become the standard for many firms, and this trend appears increasingly permanent. Further compounding problems for office owners is that The Fed now expects to cut the benchmark interest rate just once this year. With many owners looking to extend or renegotiate loans, rates remaining elevated for longer than expected spells trouble.  

The anticipated wave of distress has still not materialized, with many factors causing pain in the office sector to slowly reveal itself rather than hit all at once. Lease terms that can stretch up to 10 years mean that some tenants are still locked into pre-pandemic agreements and have yet to make an official decision on downsizing. Additionally, the process of negotiating extensions and modifications can take months.  

According to Trepp, 6.9% of office CMBS loans were delinquent in May, up from 4% in May 2023. Our office real estate outlook predicts that distress will continue to become more noticeable through at least the end of next year.  

Acceptance of the current office situation is becoming more widespread. We anticipate more finality at the individual property level, with an increase in distressed assets showing up. With this idea of ‘acceptance’, we would also expect more creativity and ingenuity on how to handle this glut of space as the industry recognizes we are still in the early phases of what is likely to be a multi-decade reshuffling.

Peter Kolaczynski, Director, CommercialEdge

The lack of comparable sales might have also contributed to slower sales activity. In 2021 and 2022, there were about 4,000 office transactions each year. Last year, sales fell by half to just over 2,000.  

As of May this year, there have been 600 sales, an increasing number of which are being sold at discounts. In 2023, over 20% of office buildings sold for less than their previous purchase price. In 2024, this figure has risen to nearly 30%. 

One silver lining for owners of existing office buildings is that the new office supply pipeline — competition for tenants in a weak market — will soon dry up, according to office real estate outlooks. Around 80 million square feet are underway currently, a figure that is much lower than in pre-pandemic years and one that will shrink further as projects deliver. To date, CommercialEdge has recorded only 6.2 million square feet of new office construction in 2024. 

Listing Rates and Vacancy

Vacancies Remain the Highest in Tech Markets 

The national average full-service equivalent listing rate was $37.72 per square foot in April, an increase of six cents from the previous month, but down 1.7% year-over-year, according to our latest U.S. office market report. 

The rates for A and A+ office spaces have decreased by 4.3% from last year, currently standing at $44.91 per square foot. Class B office rates have inched up by 0.5% to $30.52 per square foot, and Class C spaces have seen an increase of 1.2% to $23.65 year-over-year in May.  

Top Listings by Metro Area: May 2024 

Offices in Central Business Districts have experienced the most substantial decrease in rents, falling by 6.9% year-over-year to $47.64 per square foot. Meanwhile, urban offices saw a year-over-year uptick of 1.8% to $44.89 per square foot, whereas suburban office spaces decreased by 1% year-over-year to $30.62 per square foot. 

The national office vacancy rate was 17.8%, an increase of 80 basis points year-over-year. The U.S. office vacancy rates have increased sharply in tech markets since the turmoil that upended the industry at the end of 2022. Some of the highest rates were recorded in San Francisco (25.2%, up 510 basis points year-over-year), Seattle (23%, up 350 bps) and the Bay Area (20%, up 230 bps). 

Supply

New San Diego Life Science Space Faces Headwinds 

Nationally, 83.8 million square feet of office space were under construction at the end of May, representing 1.2% of existing stock. Year-to-date, a total of 18.5 million square feet of office space have been completed across the U.S. 

Office Space Under Construction (Million Sq. Ft.) 

Coming out of the pandemic, life science buildings remained among the few office types in demand, leading to a concentration of office development in this sector. San Diego, one of the top life science markets in the country, saw much of this development activity. IQHQ spent $1.6 billion on the recently completed mixed-use Research and Development District (RaDD) along the waterfront in the downtown submarket.  

The development aimed to create a new life science hub separate from UC San Diego's northern part. However, RaDD is reportedly opening without any biotech tenants. Additionally, with The Campus at Horton Plaza set to add additional lab space soon, downtown San Diego faces a potential surplus of lab facilities. 

Transactions

Average Sale Prices Tumble in Manhattan 

The U.S. office market recorded $10.2 billion in transactions through the end of May, with properties trading at an average of $165 per square foot. 

During the first five months of 2024, Manhattan lost its status as the most active market for office investment. The market led the nation in sales volume last year but fell to fifth position this year, with $570 million in sales through May. This downturn is not only caused by a decrease in the number of sales in the market, but also by a reduction in average sale prices which have fallen 66% since 2023 to $300 per square foot so far in 2024. 

2024 Year-to-Date Sales (Millions) 

Western Markets

San Diego's Vacancy Rate Climbs 310 Basis Points as New Life Science Projects Come Online 

After several AI-driven office leases, San Francisco has been designated the AI capital of the world, fostering optimism for market recovery and long-term stability. However, the benefits of the AI boom have not yet materialized in the metro, where vacancies rose by 510 basis points year-over-year in May, reaching 25.2%, the highest among U.S. office vacancy rates. Tech markets outside of California saw comparable trends, with Seattle's office vacancy rate increasing by 350 basis points and Denver's by 280 basis points. 

Despite being an established life science market, San Diego's vacancy rate also rose by 310 basis points year-over-year in May, reaching 18.5%. The market, especially downtown, might face further challenges as IQHQ's $1.6 billion RaDD development is reportedly opening without biotech tenants. Downtown San Diego is a relatively small and unproven life science submarket compared to northern areas like Torrey Pines and Sorrento Mesa.  

West Regional Highlights  

Bank OZK has a $915 million loan tied to the RaDD project, due in August 2026, and analysts are uncertain if the space will be leased in time. The soon-to-be-delivered Campus at Horton Plaza, a 10-acre, mixed-use development with life science offices, will likely put additional pressure on downtown San Diego. 

In May, San Diego led the West in office development on a percentage-of-stock basis, with its 4-million-square-foot pipeline representing 4.2% of its existing inventory. However, the majority of this pipeline consists of life science properties. As of March, the metro ranked third in the country for its life science pipeline, following Boston and the San Francisco Bay Area, hosting 16% of all nationwide projects. 

Looking at transactions, the Bay Area had the largest sales volume among western markets, with $795 million in closed office deals year-to-date through May. Nationwide, only Washington D.C. logged a higher volume, totaling $999 million during the same period. In the West, the next largest sales volume was recorded in Phoenix, totaling $496 million. 

Meanwhile, San Diego, Los Angeles and San Francisco commanded the three highest sales prices in the region, averaging $422 per square foot, $368 per square foot and $352 per square foot in May, respectively. Conversely, Denver’s $103 per square foot average sale price was the lowest among the top western markets. 

Midwestern Markets

Rent Growth Remains Slow in the Midwest with Asking Rates Below the National Average  

The Midwest office market remained one of the most sluggish, with some of the most affordable asking rents across the nation. Detroit reported the lowest average rate among the 25 largest office markets in the U.S., closing May at $22.43 per square foot. At the same time, asking rents in Chicago stood at $27.73 per square foot, $10 below the national rate. 

Looking at sales activity, Chicago was at the forefront in the Midwest, logging $223 million in office sales year-to-date through May, despite recording the lowest average sale price nationwide at just $81 per square foot. Next up, in the Twin Cities, investors closed $188 million in office sales, with properties trading at $158 per square foot, while Detroit totaled $115 million at an average price of $125 per square foot. 

Midwest Regional Highlights  

Construction in the region remained slow, with midwestern markets having some of the smallest supply pipelines in the country. In terms of square footage, Chicago led the region's development efforts with slightly over 1 million square feet under development in May, equal to 0.3% of its total inventory. Detroit had 524,000 square feet underway, accounting for 0.4% of its existing stock, while Minneapolis-St. Paul had just 35,666 square feet under development. 

Southern Markets

Washington, D.C. Leads the U.S. in Sales Volume as Distress Slowly Unfolds 

Washington, D.C., led the nation in sales volume, totaling $999 million year-to-date through May. However, much of this activity involved distressed and dislocated office properties, evidenced by several discounted transactions across the market. For instance, BlackRock recently sold a 152,000-square-foot office building in D.C.'s CBD for $26.7 million, significantly below the $43.7 million it paid for the property in 2004.  

The capital's office market has become a hotspot for office distress, with Trepp reporting that nearly three-quarters of office loans were at risk of default by the end of last year. This is largely due to the heavy concentration of government office buildings and the slow return of federal employees to their workplaces. 

South Regional Highlights  

Houston logged the second-largest sales volume in the South, with investors closing $718 million in office deals at an average of $125 per square foot. Distress is unfolding gradually in Texas: KBS Realty Advisors attempted to sell Offices at Greenhouse at a 60% discount, but the deal fell through when the buyer, Red River Asset Management, failed to finalize the purchase. Hilco Real Estate Sales also announced the bankruptcy sale of a 281,590-square-foot Class A office building at 2425 West Loop South. 

Even amid declining office values, Washington, D.C. remained the third most expensive market in the South in terms of asking rents, closing May with a $39.80 per square foot average. In line with trends observed in previous months, Miami was the priciest market in the region, at $49.08 per square foot, followed by Austin with an average of $42.48 per square foot. Conversely, Orlando ($24.53) and Dallas ($28.99) recorded the lowest rates in the region. 

On a percentage-of-stock basis, Austin led the South in development in May, with 4.4 million square feet underway, equal to 4.7% of existing stock. Considering planned projects as well, the market is looking to expand its inventory by 15.2%. However, due to high interest rates and decreased office demand, many planned projects will likely not move forward, office real estate outlooks indicate. Since the beginning of the year, Austin developers have broken ground on just 402,000 square feet of space. 

Northeastern Markets

Sales Continue Downward Trend in Manhattan 

Manhattan’s office market experienced a notable shift, falling from first to fifth place in sales volume nationwide in 2024 compared to 2023, according to our U.S. office market report. Year-to-date through May, the market recorded $570 million in office sales, trailing behind Washington, D.C., ($999 million), the Bay Area ($795 million), Boston ($761 million) and Houston ($718 million). This marks a significant decrease from year-ago figures when Manhattan totaled $1.13 billion in office sales. 

Northeast Regional Highlights 

Manhattan has seen an increase in discounted office sales, driven by rising interest rates and reduced demand. Notably, the $308 million loan backing an office tower on 1740 Broadway owned by Blackstone has sold for roughly $186 million, according to CommercialEdge data, after the private equity firm defaulted on the debt in March 2022. Similarly, a 31-story office tower in Manhattan’s Financial District is under contract for $150 million, 70% below its 2014 purchase price of $502 million. 

This downward trend is also reflected in the sale prices. As of May, the average sale price in Manhattan was $300 per square foot, down 66% from 2023. Despite this reduction, it remains the highest office sale price in the Northeast and the seventh highest among the major U.S. office markets.  

Year-to-date Sale Price Per Square Foot 

Manhattan continued to lead the U.S. office market in asking rents, with an average of $71.30 per square foot, ahead of San Francisco’s $60.79 per square foot, the second priciest U.S. office market. In the Northeast, Boston had the next-highest lease rate, coming in at $46.71 per square foot, followed by New Jersey’s $34.80 per square foot and Philadelphia’s $31.24 per square foot.  

Being a major life science hub, Boston continued to have the largest office pipeline in the U.S., with 13.6 million square feet of office space underway, accounting for 5.4% of its current stock. Manhattan followed as the northeastern market with the second-largest office pipeline at 2.8 million square feet under development, comprising 0.6% of its existing inventory, well below the 8.9 million square feet under construction one year ago. Philadelphia had 2.08 million square feet of office space under development, while New Jersey’s pipeline totaled 1.97 million square feet. 

Office-Using Employment

Information Sector Lags Behind 

Office-using sectors of the labor market added 43,000 jobs in May, according to the Bureau of Labor Statistics. This was the second-largest figure for office job gains over the last 12 months, behind the 52,000 jobs added in January. 

Year-over-year, office-using sectors of the labor market have grown by just 0.3%. According to metro data, which trails the national release, 76 of the 120 markets tracked by CommercialEdge experienced year-over-year declines in office employment as of April. Additionally, 19 markets saw growth of less than one percent. 

Office Using Employment 

Since the start of 2023, growth in the Financial and Professional and Business Services sectors has been stagnant, though both have added some workers. In contrast, the Information sector has faced year-over-year declines for 12 consecutive months. As of May 2024, the sector had 36,000 fewer workers compared to a year earlier for a decrease of 1.2%.  

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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. 

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