The Distressed Office Market Continues to Unfold Amid Stagnating Demand and Falling Property Values

Key Takeaways: 

• The average U.S. listing rate increased 1.5% year-over-year in April to $37.66 per square foot
• Up 160 basis points year-over-year, the national office vacancy rate rose to 18.3% in April
• Under-construction office space totaled 83.7 million square feet at the end of the month, of which only 3.2 million broke ground this year
• Office sales totaled $7.49 billion through April, with assets trading at $157 per foot
• San Francisco vacancy rates climb 650 basis points year-over-year to 25.9%
• None of the top Midwestern markets kicked off new construction projects in 2024
• Dallas vacancy rates increased 390 basis points, influenced by heavy construction in recent years
• Boston closed April with the largest under-construction pipeline in the U.S. at 13.9 million square feet

Trends & Industry News: Debt Service Looms Over Offices

The wave of office distress many anticipated has yet to materialize, but our latest U.S. office market report shows that many markets are exposed to potential distress.

Debt service coverage ratios — a measure of net operating income against current debt obligations — have declined for offices in recent years due to the two components of the ratio moving in opposite directions. As interest rates shot upward in the last year and a half, so did debt costs for commercial real estate. At the same time, cash flow has fallen — U.S. office vacancy rates spiked as firms downsized or eliminated physical office footprints altogether — and expenses have grown. Despite DSCRs’ downward movement, market-level average ratios show only a handful of markets exposed to widespread risk.

Using aggregated and anonymized income and expense data along with researched loan information and vacancy rates, CommercialEdge estimates market-level DSCRs for many of the metros covered by the service.

Everyone has been asking “where is this wave of distress?” The reality is that it didn’t materialize with extensions the last few years, but we are seeing an uptick, and this data shows the threat is still there in many areas.

Peter Kolaczynski, Director, CommercialEdge

In March, five of the 91 markets analyzed by CommercialEdge had average DSCRs below 1.0: Brooklyn, N.Y. (0.81), Oklahoma City (0.89), Chicago (0.90), El Paso (0.92) and Cleveland (0.96). Another eight markets — including Manhattan (1.05), St. Louis (1.16) and Nashville (1.25) — sit at or below the 1.25 ratio that most lenders require. However, it is important to note that these market-level rates are only estimates, and DSCRs can vary vastly from property to property.

Many properties within markets with low average DSCRs continue to perform well, while properties in markets with a high average DSCR face distress. CommercialEdge has DSCR estimations at the property level to identify potential future distress situations.

The forces behind downward pressure on DSCR are unlikely to reverse in the near future, according to office real estate outlooks. Demand for offices remains stagnant as hybrid and remote work has become fully entrenched within many firms. Expense increases, like insurance and maintenance, have cooled in recent months but continue to eat into net operating incomes. Interest rate cuts may begin this summer, but in all likelihood, will not be steep enough to save properties that are teetering on the edge of distress. Office loans that mature are at greater risk of distress and delinquency because of the difficulty of generating enough cash flow to cover debt obligations in the current environment. Many in the sector have adopted the mantras of “extend and pretend” and “survive until ‘25,” hoping for circumstances to improve next year.

Listing Rates and Vacancy: Vacancies Grow Everywhere

The national average full-service equivalent listing rate was $37.66 per square foot in April, a decrease of eight cents from the previous month and 1.5% year-over-year, our latest U.S. office market report reveals.

Top Listings by Metro Area: April 2024

The national vacancy rate was 18.3%, an increase of 160 basis points year-over-year. U.S. office vacancy rates have been on the upswing in nearly every market. Tech markets have been hit the worst, with San Francisco (650 basis point increase over the last 12 months), the Bay Area (400 bps) and Seattle (400 bps) all experiencing significant increases. Markets with a high concentration of financial jobs, like Dallas (390 bps) and Charlotte (380 bps), have also seen large jumps in the last year. Even lab space centers like Boston (230 bps) and San Diego (370 bps) have seen vacancies rise despite the in-person nature of most work in the life sciences field.

Supply: New Office Starts Disappear

Nationwide, 83.7 million square feet of office were under construction as of April, representing 1.2% of stock. The office under-construction pipeline has shrunk by more than 50% in the past 18 months, as buildings have been completed and starts have slowed to a crawl.

Office Space Under Construction (Million Sq. Ft.)

Office starts have been nearly nonexistent in 2024, with just 3.2 million square feet of new space breaking ground through the end of April. While office construction began slowing in response to the shifts the pandemic brought to office utilization, some development was still occurring.

In 2023, 44.2 million square feet of office space broke ground, buoyed by the life science and medical office sectors. Now, even development for those uses has dried up. Our office real estate outlook predicts that once interest rate cuts begin, developers will slowly dip their toes back into the water, but given the current state of office demand, it may be years until there is a meaningful uptick in office starts, office real estate outlooks suggest.

Transactions: High-Quality Assets Remain in Demand

Across the U.S., a total of $7.5 billion in transactions have been logged so far this year, with properties trading at an average of $157 per foot.

Top-tier assets in quality locations remained in demand, as evidenced by Columbus Properties’ $86.1 million purchase of 24th at Camelback I. The eight-story, LEED Platinum-certified, Class A building is in one of Phoenix’s hottest office submarkets. It marked the largest sale recorded by our database in the Phoenix market since 2022, yet the sale price was lower than the $100 million the property traded for in 2018.

2024 Year-to-Date Sales (Millions)

Western Markets: San Francisco Vacancy Rates Climb 650 Basis Points Amid Declines in Employment

Tech markets in the West experienced the largest increase in U.S. office vacancy rates, with San Francisco leading at 25.9%, up 650 basis points year-over-year — the highest uptick among the top 25 U.S. office markets. Due to the tech sector’s poor performance, office employment in the city has fallen 4.9% compared to last year. The Information sector alone lost 13,000 workers in the past 12 months, representing a 10.5% drop, according to the Bureau of Labor Statistics.

While San Francisco remained the priciest market in the West, asking rents decreased 9.3% year-over-year in April to an average of $59.30 per square foot. San Diego was the only market with a steeper decline in asking rents, falling 9.8% year-over-year to $43 per square foot. Despite being a market driven mainly by life sciences, San Diego also saw its vacancy rates rise 370 basis points over year-ago figures to 18.4%.

West Regional Highlights

In the Western region, Phoenix and Portland recorded vacancy rates below the national average of 18.3%, with Phoenix at 17.5% and Portland at 16.2%. Despite these lower vacancy rates, both markets logged some of the most affordable asking rents in the country: Phoenix's rents were $27.67 per square foot, up 120 basis points year-over-year in April, while Portland's rents declined by 7.4% over the same period to $27.22 per square foot. Across the top 25 office markets in the U.S., Minneapolis-St. Paul ($25.83 per square foot), Orlando ($24.84) and Detroit ($22.46) were the only metros with lower rates.

From a transactional perspective, the Bay Area led the region in sales volume, with $469 million in closed office deals year-to-date through April at an average of $231 per square foot. The next-largest sales volume was recorded in Phoenix, totaling $349 million, with properties trading at an average of $199 per square foot, according to our U.S. office market report.

The metro’s sales volume was boosted by Columbus Properties’ $86.1 million acquisition of a 309,400-square-foot top-tier office building at 2375 East Camelback Road. Despite being the largest sale in Phoenix since 2022, the property traded 14% below its price in 2018, when the seller, New York Life Insurance, bought it for $100 million.

With the office sector facing several challenges, from reduced demand to high interest rates, office sales nationwide have been driven by institutions selling high-quality assets to balance their portfolios, reduce their office exposure, and mitigate risk on their balance sheets. Nonetheless, the market is evolving to include owners who are selling because they are facing distress and upcoming loan maturities.

Midwestern Markets: Chicago Logs $208M in Sales Through April Amid Distress Hitting the Market

While borrowers often adopt the "extend and pretend" approach, a loan extension wasn't enough to save Pennsylvania-based Pembroke IV from a $25 million foreclosure lawsuit. The company failed to pay off debt tied to a six-story building at 2001 York Road in Chicago.

The property was first added to the pool of distressed offices in January 2023, after Pembroke hadn’t paid off its loan by December 2022. At the time, the loan was modified, and the maturity date was pushed to March 31, 2024, but the extension didn’t make a difference, according to Crain’s. The building was only 58% leased for most of last year, and its net cash flow hadn't been sufficient to cover Pembroke's debt service for the past two years.

Midwest Regional Highlights

As of March, Chicago had $6.8 billion of maturing loans through 2024, representing 19.4% of the market's total loan volume, our data shows. Meanwhile, the market’s vacancy rate stood at 19.1%, up just 30 basis points year-over-year in April, and rents contracted by 20 basis points, coming in at $27.85 per square foot — the sixth-lowest asking rent across the top 25 U.S. office markets.

Despite the market’s weak fundamentals, electronics company Littelfuse is relocating its headquarters to the distressed Riverway office complex in Rosemont. This complex faced a $115 million foreclosure lawsuit last summer, the largest ever filed against a suburban Chicago office. Littelfuse will occupy 53,000 square feet in the Riverway complex by the end of the year.

Typically, lenders try to sell distressed properties rather than invest in renovations and leasing efforts. However, with falling demand and reduced property prices, some lenders are opting to play the long game to recover some of the lost value.

Year-to-date through April, Chicago logged $208 million in office sales at an average price of $81 per square foot. Next up, the Twin Cities saw $177 million in closed office deals at an average of $163 per square foot, while Detroit recorded a small volume of $43 million, with properties trading at $76 per square foot.

Looking at construction activity, none of the Midwestern markets saw new construction starts in 2024. Nonetheless, as of April, Chicago had 1.03 million square feet under construction, accounting for 0.3% of its inventory. Meanwhile, Detroit had 524,000 square feet underway, equal to 0.4% of the market's stock. The Twin Cities had only 35,666 square feet under development in April.

Southern Markets: Heavy Development in Recent Years Continues to Put Upward Pressure on Texas Markets

In the South, markets with a high concentration of financial jobs experienced the largest increases in office vacancy rates. For example, office availabilities in Dallas rose by 390 basis points to 21.1% year-over-year in April — the third highest in the nation. Similarly, vacancy rates in Charlotte increased by 380 basis points to 15.6% over the same period but remained well below the 18.3% national average.

Overall, the highest vacancy rate in the Southern region was recorded in Houston at 23.6%, followed by Austin at 22.4%. Despite the Lone Star State's early reopening after the pandemic and a surge in corporate relocations driving return-to-office movements, Houston, Austin and Dallas still have some of the largest vacancies among the top 25 U.S. office markets.

South Regional Highlights

The rise in vacancies, despite healthy economic fundamentals, can be attributed to extensive development in recent years. As of April, Dallas had the third-largest new supply pipeline in the country by square footage, with 4.9 million square feet under construction, representing 1.8% of the metro's existing inventory.

Austin followed with 4.1 million square feet under development, equal to 4.4% of its stock. Across the Texas Triangle, Houston had the lowest new supply pipeline as of April, with 1.7 million square feet underway, accounting for 0.7% of its inventory.

Washington, D.C., led the Southern markets in terms of sales, with $937 million in closed office deals through April. Dallas was next, with office transactions totaling $357 million through the first four months of the year. Meanwhile, Austin led the region in sale prices, with properties trading at an average of $401 per square foot. Washington, D.C., and Miami followed with average prices of $345 per square foot and $279 per square foot, respectively.

Miami remained the most expensive office market in the South in terms of asking rents, closing April with a $49 per square foot average. Austin ($42.25 per square foot) and Washington, D.C. ($40.59 per square foot) followed with asking rents above the $37.66 national average. In contrast, Orlando ($24.84) and Dallas ($28.56) recorded the lowest rates in the region.

Northeastern Markets: Manhattan Leads the Region in Sales with Just $290 Million in Closed Office Deals

Four months into the year, sales activity in the Northeast remained slow, with only $884 million in office deals closed across the region’s leading markets. Manhattan led with $290 million in transactions, followed by New Jersey with $280 million. Boston saw $223 million in closed office deals, while Philadelphia logged just $92 million in transactions year-to-date through April.

As a major life science hub, Boston continues to experience higher development activity than any other market in the U.S. As of April, the metro area had 13.9 million square feet of office space under construction, representing 5.6% of its inventory. Although Boston's development pipeline decreased by 8% compared to the same period last year, when it accounted for 6.1% of inventory, it remains significantly higher on a percentage-of-stock basis than the national pipeline of 1.2%.

Northeast Regional Highlights

Despite being a life science hub, Boston saw a 230-basis point increase in vacancy rates, marking the second-largest uptick in availability after Philadelphia’s 280-basis point rise. At the same time, Manhattan’s office vacancy rate grew by 80 basis points year-over-year in April, while New Jersey saw a 150-basis point increase.

Manhattan continued to post the steepest asking rent in the U.S., closing April at $69.72 per square foot. Following Manhattan, Boston was the second-most expensive office market in the Northeast, with an average asking rent of $46.62 per square foot. Meanwhile, New Jersey's and Philadelphia's rents were $35.40 per square foot and $31.88 per square foot, respectively.

Office-Using Employment: Employment Declines in the Information Sector

Office-using sectors of the labor market lost 6,000 jobs in the month of April, according to the Bureau of Labor Statistics. The information sector lost 8,000 workers, and professional and business services lost 4,000. Financial activities were the only office-using sector that grew in April, adding 6,000 workers on the month. Office-using employment has been stagnant during the past year, growing only 0.4% in the past 12 months. The annual growth rate has not topped 1% since last June. The information sector has been the worst performer of the bunch, declining 1.3% over the past 12 months.

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. 

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Correction:

A previous version of this report stated that the national office vacancy rate was 18.8% as of April. The actual figure was 18.3%.