• The average U.S. office listing rate stood at $38.04 per square foot, up 1.1% year-over-year  
• Up 80 basis points year-over-year, the national vacancy rate rested at 16.6%  
• Under-construction office space reached 123 million square feet or 1.9% of total stock 
• Office sales totaled $1.9 billion in January, with assets trading at $202 per square foot 
• Remote work and tech layoffs continue to push Denver vacancy rates higher, reaching 18.3% 
• Listing rates in Chicago and the Twin Cities were among the four lowest in the country 
• Dallas led development in the South with nearly 7.4 million square feet underway 
• Boston recorded the highest average sale price at $1,054 per square foot 

In the years since the pandemic unsettled the office market, many have been anticipating an increase in distressed offices. While distressed activity has been muted to this point, weak demand, falling prices and a potential recession could lead to an increase in distressed sales in 2023, as well as one of the smallest sales volumes since the Great Recession, the CommercialEdge U.S. office market report reveals. 

Higher interest rates have already put pressure on owners with floating-rate debt and will provide a substantial challenge for loans that need to be refinanced this year. Remote and hybrid work have become entrenched and the tech industry — which drove much of the leasing of office space in recent years — is now contracting and laying off workers, thus further decreasing demand for office spaces.   

“We know distress activity will increase this year. We are closely monitoring the loans that are coming due and how they are being handled on both the owner and lender side.”

– Peter Kolaczynski, CommercialEdge Senior Manager

Metros with high quality office products might be better positioned to weather the storm, as tenants continue to look for well-amenitized, Class A office space in premium locations. This trend is expected to put downward pressure on older assets, especially those that are not well-located and well-kept, positioning these at a higher risk of distress as well.  

Additionally, with demand for office space continuing to be lower, we expect that many of the distressed properties that are sold may be targeted for redevelopment and conversion into life sciences or multifamily properties. 

Listing Rates and Vacancy: Vacancy Increases Accelerate in Tech-Heavy Metros 

Across the top 50 U.S. office markets, the average full-service equivalent listing rate was $38.04 in January, an increase of 1.1% over the past 12 months. At the same time, the U.S. office vacancy rate continued to rise, reaching 16.6%, up 80 basis points over January 2022. 

Although office vacancy rates continued to climb in most markets, some places have seen rates rise more rapidly than others since the pandemic upended the office market. Metros that owe their rapid growth to the tech sector have particularly felt the pressure of the remote work culture and recent tech layoffs.  

Top Listings by Metro Area: January 2023

Despite the steady rise in vacancy rates over the last couple of years, listing rates are still holding steady, thanks to tenants’ flight to quality. In January, the average listing rate for Class A and A+ office space was $46.70 per square foot, marking a 2.0% increase year-over-year. At the same time, Class B rates fell 0.7% to $30.11 per square foot.  

In terms of location, office assets in CBDs claimed the highest listing rates at $51.43, up 3% over the past 12 months, while suburban assets stood at $30.47, also up 3.1% year-over-year. Urban office spaces, however, continued to depreciate, with rents falling 4.3% below the figures recorded at the beginning of 2022. 

Supply: Five Markets Account for One Quarter of National Construction Pipeline

As of January, there was 123.6 million square feet of office space under construction nationally, accounting for 1.9% of total inventory. The top five markets by total square footage — Boston, Manhattan, Dallas, Austin and San Francisco — accounted for more than a quarter of all new supply being built. 

Office Space Under Construction (Million Sq. Ft) 

The influx of people into Texas in recent years has helped prop up office markets that have been hit by remote work. Dallas has let developers remain active in the market, with 4.1 million square feet started last year and more soon on the way. The Fields — a 180-acre, $2 billion mixed-use project in Frisco — will eventually include four million square feet of office space alongside retail, restaurants, apartments and hotels. 

Although offices in urban locations experienced the sharpest decline in asking rents, developers were most active in these areas. As of January, there were more than 66.5 million square feet of office space under construction in urban locations, representing 4.9% of total stock. Meanwhile, offices in CBDs and suburban areas are set to increase the national stock by 1.4% and 1.2%, respectively.  

Transactions: Distressed Sales Likely to Increase in 2023

CommercialEdge recorded $1.9 billion in office transactions in January, with properties trading at $202 per square foot.  

But taking into account the overall economic uncertainty, the entrenchment of remote work and the upheavals triggered by increased interest rates, office market outlooks anticipate that there will not be much capital for office transactions this year.  

Investors may still be able to find loans for well-located buildings with strong occupancy and cash-flow, but for the most part, deals for office buildings will likely fail to materialize. It’s expected that office transaction volumes in 2023 will be at their lowest levels since the years following the Great Financial Crisis. 

Year-to-Date Sales (Millions) 

Higher interest rates have already put pressure on owners with floating rate debt and will provide a substantial challenge for loans that need to be refinanced in 2023. The national average sale price of an office property fell from $269 per square foot in the first quarter of 2022 to $214 per square foot in the fourth quarter. A flood of distressed office sales could trigger a downward price spiral for offices. 

Distressed sales will most likely increase in frequency this year, but it is too early to say whether it will be a large wave. With demand for office space continuing to be soft, many of the distressed properties that are sold may be targeted for conversions into life sciences or multifamily, with some razed and entirely redeveloped. 

Western Markets: Remote Work Drives Up Vacancies in Denver 

With vacancy rates rising across the nation’s largest office markets, the West also followed suit. For instance, Denver’s vacancy rate in January stood at 18.3%, up 200 basis points (bps) over the last 12 months and 370 basis points over the last two years. Other leading tech markets, such as Seattle, San Francisco, and Portland also saw their office vacancy rates increase by 1.47%, 2.87 % and 3.20% year-over-year in January.  

In fact, all leading western markets experienced continued increases in vacancies over the past 12 months. While Portland’s 3.2% rise was the most significant, even San Diego — with its thriving life sciences sector — saw a year-over-year uptick of 0.27%. This lifted the local vacancy rate to 14.09%, which is still the lowest among leading western office markets. 

Circling back to Denver, the main cause of increasing office vacancy rates in the Mile High City is remote work. According to the Census Bureau’s American Community Survey, 28% of respondents in the market reported working from home, one of the highest shares in the country. Additionally, Denver has benefited from robust growth in the tech sector in recent years, and the layoffs currently hitting that industry will hamper the market. Denver’s sublease rate was 1.8%, a figure that could move upward in the future. 

West Regional Highlights 

Despite a nearly 19% vacancy rate, San Francisco continued to lead the West in asking rents at $67.43 per square foot. Local trends show that listing rates were still growing at a healthy pace here, further widening the pricing gap between San Francisco and other West Coast markets. Those include the Bay Area which at $57.06 per square foot demanded the second highest asking rents. 

Additionally, the West Coast’s top markets also led the region in terms of office development: San Francisco and Seattle both had 6.5 million square feet under construction in January, accounting for 4.2% and 4.7% of their existing stocks, respectively. And while the Bay Area’s office pipeline is set to increase the existing local stock by just 2.9%, that will still add 5.8 million square feet of new offices.

The three markets also had ample new stock in the planning stages, with San Francisco’s under construction and planned pipeline as high as 20%. However, considering the increasing headwinds faced by both the office and tech sectors, much of that planned pipeline may not materialize. In particular, there is growing nationwide concern regarding a potential spike in distressed office sales, due to low occupancy, expiring leases and maturing loans.  

Sale Price by Asset Type 

Tenant flight-to-quality has been taking place since the pandemic, with firms decreasing the size of their footprints but increasing the quality of the space they lease. This puts older assets, especially those that are not well-located and have not been well-maintained, at high risk of distress as well. Yet even trophy towers are not exempt, with Brookfield defaulting on $784 million in loans for two office towers in downtown Los Angeles. 

For now, however, distressed sales have remained mostly in the realm of future worries. But what has materialized is the decrease in sale prices for office assets: While Q1 2022 averaged $290 per square foot, Q4 ended at $271 per square foot. Moreover, January assets traded at an average $202 per square foot, totaling $1.9 billion, a third of which was concentrated in just two markets: Houston and Miami. On the West Coast, Los Angeles had the highest sales volume with $96 million in office deals, followed by San Francisco’s $73 million sales volume and Phoenix with $57 million.  

Midwestern Markets: Chicago & Twin Cities Off to a Slow Start in 2023 

The Midwest office market remained one of the most sluggish nationwide, with key fundamentals in the region’s leading markets changing little overall. Asking rents in Chicago saw a slight 0.26% uptick month-over-month in January, ticking up to $27.80 per square foot.  

At the same time, the St. Paul – Minneapolis market closed the month at $25.85 per square foot, decreasing 0.8% compared to December. These rates were among the four lowest in the country, accompanied by Phoenix’s $27.58 per square foot and Orlando’s $24.75 per square foot rates.  

At 19.44%, Chicago also recorded the fourth highest vacancy rate across the country in January, remaining flat both month-over-month and year-over-year. In the Twin Cities, vacancy rates did increase somewhat, inching up 0.12% on a month-over-month basis. Year-over-year, however, the metro experienced a higher 0.55% increase in vacancy rates, stabilizing at 15.07%. 

Midwest Regional Highlights  

Considering the region’s fundamentals and Chicago’s recent incentives to encourage office conversions, developers continue to remain wary of bringing too much new supply to the market. As of January, the Windy City had nearly 2.7 million square feet in the pipeline, accounting for 0.9% of its stock. Meanwhile, the Twin Cities had 676,369 square feet of office space underway in January, representing 0.6% of total inventory, outpacing only Tampa’s 382,099 square feet. 

And while Chicago ended 2022 among the top 10 metros for office transactions with $3.2 billion in sales, investors closed a mere $22 million in deals in January. The Twin Cities recorded the same amount in transactions, with the average sale price per square foot coming in at $203.  

Southern Markets: Developers’ Confidence in Dallas Continues to Increase  

Markets in the South continued to reap the benefits of the pandemic-driven worker migration and company relocation trends. Thanks to the more affordable local cost of living and business-friendly environment, Texas markets have especially benefited from the influx of residents, boosting developers’ confidence in the region. 

Although Austin had the largest construction pipeline on a percentage-of-stock basis at 7.6% (both in the region and nationally), Dallas led development in the region in terms of square footage, with nearly 7.4 million square feet underway. Vacancy rates have also been more resilient in the metro, increasing only 0.4% over the past 12 months, underscoring developers’ confidence in the market despite the headwinds faced by the office sector.  

Office Space Under Construction & Planned (% of stock) 

In terms of sales volume, another Texas market, Houston, took the lead nationally, closing $324 million in office deals in the first month of the year. This also broke down to an average price of $184 per square foot. Miami had the second largest sales volume nationwide at $316 million but resulted in a significantly higher sale price of $549 per square foot. 

Moreover, Miami also had the fourth-highest listing rate among the country’s top 25 markets, closing January at $47.24 per square foot. Austin and Washington, D.C. also recorded rates in the $40 range, exceeding the $38.04 per square foot national average. At the bottom of the list stood Tampa ($28.11), and Orlando ($24.43), although both metros saw slight increases on a month-over-month basis. 

South Regional Highlights 

Vacancy rates remained in the high teens in most markets in the South, with the exception of Houston and Atlanta where vacancy rates hit 25.99% and 20.03%, respectively. Austin had the third-highest vacancy rate in the region at 19.13%, up 283 basis points compared to January 2022. Nonetheless, this uptick in Austin office vacancies is negligible, considering the large amount of space that hit the market last year. At the same time, office vacancy rates remained flat month-over-month in Charlotte, with the metro’s 13.21% vacancy still one of the lowest rates in the region. 

Northeastern Markets: Boston Leads the Nation with Largest Construction Pipeline by Square Footage 

Among the 25 largest office markets in the U.S., Manhattan remained on the top for office asking rates at $75.74 per square foot, well above the second-highest rate recorded in San Francisco ($67.43) per square foot and the third-highest rate of $57.06 per square foot in the Bay Area. Overall, most office markets in the Northeast registered rates below the national average of $38.04 per square foot, with Philadelphia’s the lowest at $31.42 per square foot. 

In terms of vacancies, Brooklyn still had the largest amount of vacant space in the Northeast in January, with rates at 19.71%. On the national level, this rate was exceeded only by Atlanta’s 20.3% and Houston’s 25.99%. But Manhattan’s average vacancy rate grew at the fastest pace in the region, increasing by 2.59% compared to January 2022. 

Northeast Regional Highlights 

Developers were most active in Boston, with 12.9 million square feet of office space underway as of January, accounting for 5.4% of its total stock. Looking at it in terms of square footage, Boston had the highest pipeline nationwide, but also the second highest on a percentage-of-stock basis. Conversely, New Jersey had the lowest pipeline in the region, with roughly 1.5 million square feet or 0.8% of its total inventory under construction. 

In line with national trends, sales activity was muted across leading Northeastern markets: New Jersey was in the lead with $96 million in office transactions, followed by Philadelphia’s $69 million sales volume and Boston’s $56 million. Nonetheless, Boston saw the highest average sale price at $1,054 per square foot. 

Office-Using Employment: Washington D.C. Struggles to Add Jobs 

Office-using sectors of the labor market grew 3.1% year-over-year in January, with professional and business services adding 82,000 workers in the month and financial activities adding 6,000 according to the Bureau of Labor Statistics (BLS). However, the information sector lost 5,000 jobs per the same source. 

Office-Using Employment Growth by Sector  

In the nation’s capital, office-using employment growth remained sluggish. Metro employment data for December showed Washington, D.C. growing at just 0.4% year-over-year, the lowest rate of growth among the top 25 office markets covered by CommercialEdge.  

Yet slow growth in traditional office-using sectors only paints a partial picture of the struggles in D.C.’s office industry. Unlike other markets, much of D.C.’s office employment is made up of government workers, and BLS data shows that employment in the federal government sector fell 3.5% in 2022. Further compounding issues for the market, the federal government has embraced remote and hybrid work as well, considering it a competitive advantage in a tight labor market. 

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. 

The post Weak Demand, Falling Prices and Potential Distressed Activity Predict Muted Sales for 2023   appeared first on CommercialEdge.

Walkable urban spaces are known as well-connected, mixed-use areas, including different real estate products from multifamily and single-family housing to retail and office spaces, as well as recreational areas, such as museums or sports venues, located within a half-mile radius. 

The 2023 Foot Traffic Ahead report, released by Smart Growth America and produced in collaboration with Places Platform LLC, takes an extensive look at walkable urbanism in the U.S. by ranking the top 35 metros based on what percent of their real estate inventory (by square footage) is in walkable areas. The report focuses on four asset types: office, multifamily, retail and for-sale housing. 

Across the 35 metros ranked, around 16% of all four real estate products are in walkable urban places, the report reveals. However, the proportions between these product types in walkable spaces differ significantly. Overall, 42.1% of all office spaces in the top 35 metro areas are in walkable urban spaces. Multifamily makes up 30.4%, retail 18.5%, whereas for-sale housing accounts for 11.6%.  

To rank the metros, the study draws on data from Yardi Matrix, Rocktop Partners, the American Enterprise Institute Housing Center and other publicly available data.

Coastal Metros Take the Lead in Walkability 

Looking at all four property types, the highest-ranking metro regions for walkability are New York City, Boston, Washington, D.C., Seattle, Portland, San Francisco, Chicago and Los Angeles. On the other end of the spectrum, the lowest-scoring regions include Orlando, San Antonio and Las Vegas.  

Unsurprisingly, the most walkable urban metros tend to be on the coast, with historic rail transit networks and a history of more compact urbanism predating 1940. However, the lowest-scoring metros — mostly in the Sunbelt — are just undertaking the effort to introduce walkable urbanism for the first time in generations, the study notes. 

While the percentage share of different product types varies across the metros, office and multifamily products are the most concentrated in walkable urban places, followed by retail. New York City stands out with 73.2% of its office, 70.3% of its multifamily and a significant 59.1% of its retail space in walkable areas.  

At the same time, Boston has 47.3% of its office, 44.4% of its multifamily and only 11.2% of its retail inventory in walkable urban spaces. The lowest ranking metro, Las Vegas, has only 6.5% of all office, 4.4% of all multifamily and 7.4% of all retail in walkable areas.  

Walkable Urbanism Puts Upward Pressure on Real Estate Prices 

The walkability scores have a notable economic impact on metropolitan regions and the overall U.S. economy. Although walkable urbanism accounts for roughly 1.2% of the land within the largest 35 metros, it accounts for 19.1% of all U.S. real GDP. Evidently, this means that walkable hubs account for a large amount of the region’s tax revenues from land values and other sales taxes. However, this also resulted in a price premium for office and multifamily products in these areas.   

While the percent change in premiums has decreased since 2018 in almost every metro region largely due to the pandemic, real estate in walkable urban spaces is by no means more affordable now. For instance, in New York City, the price for office product premium decreased by 52% from 2018 to 2021, but still stood at 105%. At the same time, the premium in Boston was positioned at 83%, down only 5% over the same period.  

Conclusions 

The high demand for walkable urbanism and the lack of supply is expected to continue to drive up price premiums in the near future. According to the report, the imbalance between supply and demand underscores the urgency of policy and zoning reforms regarding the development of well-connected mixed-use communities to promote social equity, drive economic activity and boost overall health and resident satisfaction.  

The post Walkable Urbanism to Drive Future Real Estate Development in the U.S.  appeared first on CommercialEdge.

• The average U.S. office listing rate stood at $38.19 per square foot, down 0.7% year-over-year 
• Up 90 basis points year-over-year, the national vacancy rate rested at 16.5% 
• Under-construction office space totaled 135 million square feet at the end of the year, with another 261 million square feet in the planning stages  
• 2022 office sales totaled $30 billion less than 2021’s $116 billion volume
• At $930 per square foot, San Francisco remained the unchallenged leader of office sales prices in 2022 
• Construction pipelines in Chicago and the Twin Cities stayed under 1% of their respective local stocks 
• With 8.7% of its stock under construction, Austin continues to lead U.S. office development  
• Manhattan asking rents remained the highest nationwide, closing the year at $76.09 per square foot

Nearly three years after the COVID-19 pandemic upended the office sector, its future remains unsettled. Even as some firms become more forceful in bringing workers back into the office, many have fully committed to hybrid and remote work policies. The CommercialEdge U.S. office market report anticipates 2023 to bring more uncertainty and change in the office sector as it moves towards a post-pandemic status quo.

Higher interest rates are expected to hamper the new supply pipeline as well as transactional activity in 2023. Some buildings in attractive locations will break ground but many projects will be paused or altogether canceled. Higher rates will lead not only to fewer office sales but also to lower prices for properties that do trade.

Additionally, tenants’ flight-to-quality is expected to persist in 2023. Businesses that want employees in the office more often, but do not want to use a heavy-handed approach, are looking for high-quality amenitized space to entice workers to come in, embracing smaller footprints in premium locations.

As a result, developers are focused on increasing the national Class A office supply to support the evolving needs of future tenants. At the end of 2022, Class A and A+ office space under construction totaled nearly 126 million square feet nationally, while Class B space accounted for less than 10 million.

As the flight-to-quality continues, we will be watching to see how much of a role space reduction plays in these leasing decisions, and to what degree coworking becomes an option as a high-quality landing spot.

Peter Kolaczynski, CommercialEdge Senior Manager

Listing Rates & Vacancy: High-Quality Sublease Space Keeps Rates Steady

The average full-service equivalent listing rate was $38.19 in December, down 0.7% year-over-year but up 16 cents over November. At the same time, the national vacancy rate was 16.5% in December, an increase of 90 basis points over the last 12 months.

While U.S. office vacancy rates have risen steadily over the last few years, average listing rates have yet to fall in response. This is because average rates reflect both the quality of space listed as well as underlying fundamentals. With plenty of high-quality space hitting the market in recent years, not only through direct vacancies but subleases as well, average listing rates have managed to hold fairly steady so far.

Top Listings by Metro Area: December 2022

In Seattle, for example, where the sublease vacancy rate is 3.8%, large blocks of space have been listed well above the average market rate. Zillow — which has been hampered by a rapid downturn in the home market and laid off thousands of workers in 2022 — recently listed seven of its 12 leased floors at the Russell Investments Center in the Commercial Business District of Seattle, an A+ building.

Overall, class A and A+ buildings did more than just hold steady as the flight-to-quality trend intensified: In 2022 top tier spaces commanded an average rate of $46.69 nationwide, marking a 1.9% increase over 2021 figures. At the same time, class B rates slid 0.4%.

Moreover, despite the early panic of CBDs being abandoned, it was, in fact, CBD office assets that saw listing rates inch up 2.3% year-over-year, while suburban assets contracted 0.5%. Urban office spaces had an even more noticeable depreciation in listing rates: 2022 closed with rents 4.4% below figures logged at the end of 2021.

Supply: Office Starts Remained High in Select Markets in 2022

Nationally, 135.3 million square feet of office stock were under construction nationally, representing 2.1% of stock. An additional 261.3 million square feet are currently in the planning stages of development, representing 4% of stock. Due to the rising cost of capital, economic uncertainty, and firms permanently reducing their office footprints, many of the projects in the planned portion of the pipeline are expected to be delayed or outright canceled in 2023, according to office real estate outlooks

While new office development has slowed in recent years, developers still seized opportunities to build high-quality, well-located buildings. Austin, for example, was popular with developers last year, as it consistently led the nation in office utilization metrics, while also increasing its labor pool by a significant margin by adding 59,000 office jobs since the start of 2021.

Office Space Under Construction (Million Sq. Ft)

Thus, the Texas capital saw 5.7 million square feet in office starts in 2022, an increase of 2 million square feet over 2021 starts. Among last year’s iconic starts was Waterline, a mixed-use tower that will include 700,000 square feet of office space, and The Republic, a 48-story tower with ground floor retail and more than 50,000 square feet of amenities. Notably, both broke ground in the second half of 2022, further increasing Austin’s already robust pipeline.

Transactions: Sales Slow in Second Half of 2022

CommercialEdge has recorded $83.6 billion in office transactions for 2022, at yearly average of $247 per square foot. A lag in collecting data for all sales means that these numbers are not yet final, but it is certain that last year’s investment volume will be lower than 2021’s $116 billion at an average of $280 per foot.

At the market level, Manhattan remained the leader of the pack, closing more than $6 billion in office sales in 2022, with Boston’s $4.71 billion the next-highest, closely followed by Dallas at $4.66 billion. In terms of pricing, San Francisco also held on to its leading position, with assets here trading at an average $930 per square foot, followed by Manhattan at $733 per square foot and Seattle coming in third at $542 per square foot.

Year-to-Date Sales (Millions)

Houston, Orlando and the Twin Cities stood on the other end of the pricing spectrum among the country’s 25 largest markets in the U.S., with office spaces selling for $132 per square foot, $176 per square foot and $180 per square foot, respectively. Orlando was also among leading markets with more muted sales totals as well. Specifically, Portland, Orlando and Brooklyn closed the year with the smallest sales volumes among leading office markets, totaling $184 million, $667 million and $767 million, respectively.

Looking to the year ahead, office sales will likely be even more muted in 2023 due to rising interest rates and a potential looming recession. Uncertainty will lead to growth in the bid/ask spread, limiting the number of sales until there is more clarity in the evolution of the economy and interest rates.

Sale Prices by Asset Class

Western Markets: Five of the Eight Highest Office Sales Prices Claimed by the West

While Portland did indeed have the lowest sales volume among the county’s top 25 markets at $184 million, leading Western markets closed 2022 with sales volumes that ranged between $2 billion (San Francisco) and $3.39 billion (Los Angeles). The Bay Area was the only other exception besides Portland, closing $4.58 billion in office sales — the fourth largest volume nationwide. It achieved that figure with an average price per square foot of $439, one of the highest not only in the West but nationwide as well.

In fact, western markets claimed five of the eight highest sales prices, including two of the top three. Specifically, Seattle had the third highest price per square foot at $542, and San Francisco remained the unchallenged price leader at $930 per square foot.

Sales Price Per Square Foot

Taking into account the prices claimed by properties traded in these markets, developers have continued to develop office spaces here, with the construction pipelines of both Seattle and San Francisco accounting for 4.2% of their respective stocks. But San Diego’s 4.77 million-square-foot pipeline accounted for 5.1% of its stock — the highest share among markets in the West.

The Bay Area’s under construction and planned office projects now total the equivalent of 16.6% of its existing footprint. Conversely, projects under construction in Phoenix are set to add the equivalent of just 0.6% of the existing local office stock for an increase of 845,000 square feet.

The Bay Area and San Francisco also led in terms of asking rents, with their 2022 averages coming in at $55.89 per square foot and $67.18 per square foot, respectively. Only Manhattan’s $76.09 rate was higher in the entirety of the U.S. Rents in leading western markets were mostly on the rise year-over-year, with Denver the only exception: Rents declined 2% here, stabilizing at $29.89 per square foot at the end of the year.

West Regional Highlights

Of note is also the fact that San Diego continued to stay ahead of Los Angeles, closing 2022 with an asking rate of $43.58 per square foot, compared to Los Angeles average of $42.62 per square foot. In fact, San Diego’s office market outperformed Los Angeles in vacancies as well, posting a slightly lower rate of 14.24%. However, these office vacancy rates were some of the lowest among the country’s top 25 office markets, with Seattle and Denver’s vacant spaces surpassing 18% of the local stock and San Francisco reaching 19.28%.

Midwestern Markets: Chicago Ends 2022 with $3.2 Billion in Office Sales, Despite One of the Lowest Prices per Square Foot

Despite pressures from macroeconomic headwinds and overall weakening office fundamentals, Chicago remained an attractive investment market for investors. Over the past year, the Windy City saw nearly $3.2 billion in closed office deals, despite recording a price per square foot of just $187, one of the lowest across the U.S. In fact, Chicago outpaced only Philadelphia ($186), the Twin Cities ($180), Orlando ($176) and Houston ($132). 

With a price per square foot slightly below Chicago’s, the St. Paul – Minneapolis market registered a more sluggish sales volume in 2022, totaling just over $1.5 billion. Moreover, with the vacancy rate also holding steady in the metro — just below 15% — developers remained cautious about increasing the existing office stock.

In December, the Twin Cities had merely 632,500 square feet of office space under construction, accounting for 0.5% of total inventory, exceeding only Portland’s 416,000 square feet and Tampa’s 344,00-square-foot pipeline. 

Midwest Regional Highlights

Although Chicago is now offering incentives to boost office conversions to housing and other mixed-use properties, the metro had around 2.3 million square feet of office space underway as of December. That accounted for 0.9% of total stock, and with an additional 5.3% in the planning stages. Nonetheless, amid the current market pressures, it remains to be seen how much of that will actually materialize in 2023 and beyond.

While Chicago saw a slight uptick in asking rates on a year-over-year basis, reaching $27.73 per square foot, the metro continued to post one of the lowest rates nationwide. At the same time, listing rates in St. Paul – Minneapolis remained virtually unchanged compared to December 2021 figures, closing 2022 at $26.07 per square foot.

Southern Markets: Office Construction Remains Robust in the South, as Austin’s Pipeline Reaches 8.7% of Its Stock

While the national construction pipeline stood at 2.1% at the end of 2022, Southern markets, especially those in the Sunbelt, continued to lead at much higher rates. In fact, the four largest construction pipelines on a percentage-of-stock basis were in Austin (8.7%), Charlotte (6.3%), Atlanta (6.3%) and Nashville (5.4%). Austin remained the darling of developers looking to increase top tier office space in a market with one of the highest office usages nationwide — one that also saw a significant increase in office sector jobs.

Thus, the Texas capital closed 2022 with the equivalent of 8.7% of its existing stock under construction that will increase Austin’s office footprint by 7.7 million square feet. While a slowdown in development is expected at a national level, the bullishness of industry players regarding this market may result in much of its planned stock also materializing. If all planned projects were to go through, it would further increase Austin’s office footprint by 15%.

Office Space Under Construction & Planned (% of stock)

On the other end of the spectrum stood Tampa, where office projects with shovels in the ground represented 0.5% of the local stock or nearly 344,000 square feet, by far the lowest pipeline among leading office markets. Tampa also had one of the smallest sales volumes in 2022, closing the year with $847 million in office sales. However, Orlando had an even slower sales year, with only $667 million in office deals, outperforming only Portland’s $184 million total.

Moreover, Orlando also had one of the lowest sales prices among the country's top 25 markets with the average office sales price for 2022 coming in at $176 per square foot. Only Houston’s average was lower at a mere $132 per square foot. Meanwhile, Miami and Austin ranked among the 10 priciest office markets in terms of sales prices, with Miami at #9 with an average of $396 per square foot and Austin at #10 with a $380 per square foot average.

South Regional Highlights

In terms of asking rents, Orlando yet again stood out, with its $24.16 per square foot rate, the lowest of the South’s top office markets, despite a fairly robust increase over 2021 figures. The highest asking rents were claimed by Miami, as expected. Its $47 per square foot rate was followed by Washington, D.C.’s $41.42 rate and Austin’s $41.06 average as the only three Southern markets with asking rents north of $40 per square foot.

Vacancy rates remained in the high teens in the South, with Charlotte’s 13.21% vacancy rate the lowest by a significant margin, while Houston’s 25.81% vacancy was the highest. In fact, it continued to increase in 2022, coming in 1.43% higher compared to December 2021. But the highest increase in vacancies unfolded in Austin, where millions of square feet of new space hit the market last year. Taking that into account, a 2.54% year-over-year increase in the local vacancy rate actually signals continued strong demand in the market.

Northeastern Markets: Manhattan Remains Priciest Office Market for Asking Rents by Significant Margin

Manhattan remained the most expensive market for office rents in 2022 as well, closing the year at $76.09 per square foot, following a slight uptick over year-ago figures. In fact, Manhattan asking rents were nearly $9 higher than the next priciest rate, San Francisco’s $67.18, and $20 higher compared to the third highest average asking rent of $55.89 in the Bay Area. Office rents in Boston, New Jersey and Philadelphia stayed in the $30 per square foot range, with Philadelphia’s 2022 average stabilizing at $31.30 per square foot.

Vacancies in the Northeast’s leading office markets remained mostly in the teens, with Brooklyn’s 19.11% the highest. At the same time, Manhattan’s average vacancy rate grew at the region’s fastest pace: 2.41% year-over-year.

Manhattan also closed 2022 with the largest development pipeline in terms of square feet, with 13 million square feet under construction, representing 2.8% of its existing stock. Although intensifying headwinds mean it's unlikely that the additional 2.2% of planned office projects will all materialize. Boston was close behind with its 12.69 million square feet of under-construction office space that are set to boost the existing office stock by 5.3%, with another 6.2% in the planning stages.

Northeast Regional Highlights

Manhattan also claimed the largest sales volume nationwide, accounting for $6 billion of the $83.6 billion national total. Boston boasted the second largest volume, totaling $4.7 billion in office sales, while New Jersey amassed $3.6 billion over the course of the year. Conversely, Brooklyn’s transactional sector was the third- slowest among leading markets, closing $767 million in office sales, despite a $532 per square foot sales price. In fact, Philadelphia’s $1.16 billion sales total was double that of Brooklyn, even as it featured one of the lower sales prices of $186 per square foot.

Office-Using Employment: Office Jobs Decline in December

Office-using sectors of the labor markets lost 6,000 jobs in December, according to the Bureau of Labor Statistics, marking the second monthly decrease since the onset of the pandemic in early 2020. Overall, financial activities gained 5,000 jobs in December 2022, but information lost 5,000 positions, while professional and business services lost another 6,000.

However, the downward trend has been apparent in most of the second half of 2022. From April 2021 through September of 2022, year-over-year office job growth was higher than 4% every month but fell to just 2.6% in December.

At the same time, between January 2021 and July of 2022, the office sector added an average of 117,000 jobs a month. But in the last five months, they have averaged only 25,000 jobs per month. This is yet another unfortunate development for the office industry, which needs job creation to replace demand that disappeared due to remote and hybrid work.

Office-Using Employment Growth by Sector

Despite the murky picture on a national level, some markets — mainly in the Sunbelt — continue to see robust growth in office employment. Metro data for the month of November, which trails the national release, showed strong annual growth in Dallas (6.4%), Atlanta (6.1%) San Francisco (6.0%) and Charlotte (5.9%).

While some regional markets allow for careful optimism, office-using employment will likely further decelerate as tech layoffs bleed into 2023 and a potential recession emerges. However, even with the recent woes of the tech sector, giants like Apple and Twitter, as well as other tech companies, have shied away from fully remote work, allowing for a potentially more positive office market outlook.

Trends & Industry News: Tech Lays Off Workers and Downsizes Offices

Interest in conversions of office buildings into residential and mixed-used properties will likely remain high in 2023 but projects may continue to struggle to gain traction. With offices vacant and housing in short supply across the county, converting offices seems like a logical solution.

However, many offices are ill-suited to conversions and without tax incentives and other financial resources from state and local governments, many projects may not pencil out in a high-interest-rate environment. Chicago was among cities that promised such incentives while soliciting bids for conversions of office buildings on La Street Corridor. It got nine proposals totaling $1.2 billion for a wide array of uses, from housing to an e-sports gaming arena.

National New Supply Completed & Forecast

Looking ahead to other trends for the year, demand for coworking will continue to grow in 2023, CommercialEdge’s U.S. office market report predicts Even with hybrid and remote work becoming prominent, most firms still want office space for face-to-face collaboration, trainings, and team building.

Flex spaces provide this without the long-term commitment of a traditional office lease. As a result, in 2023, demand will lead to growth not only for traditional coworking providers but will likely also lead to further flex space offerings from brokerages and office owners that are looking to increase occupancy and cash flow.

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 have 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.

The post U.S. Office Market Closes 2022 with Still-Rising Vacancies & Declining Sales appeared first on CommercialEdge.

• The average U.S. office listing rate stood at $38.06 per square foot, down 3.1% year-over-year
• Up 110 basis points year-over-year, the national vacancy rate rested at 16.2%
• Under-construction office space totaled 132 million square feet in November
• $80.4 billion in office sales were closed in the first 11 months of the year
• Seattle moved forward with 5.6 million in office projects despite tech layoff challenges
• At $124 per square foot, Twin Cities’ sales price remained the lowest among leading office markets
• With a sales volume of $3.66 billion, Atlanta was on track to surpass 2021 totals
• Manhattan vacancies still rising but the market still commanded the nation’s highest asking rent at $75 per square foot

Trends & Industry News: Tech Lays Off Workers and Downsizes Offices

Fueled by an abundance of cheap capital and investor search for yield, tech companies rapidly expanded in recent years, hiring thousands of workers as they competed for talent. This year, those companies have reversed course and begun to shrink their payrolls.

However, tech companies have not only been laying off workers in an effort to cut costs but are also downsizing office footprints, especially in gateway markets, data from CommercialEdge’s latest U.S. office market report reveals. Meta, for example, has already given up its presence at four office buildings and is set to give up its presence at two more — and this only since its third-quarter earnings call.

We’re paying close attention to WFO policy announcements and whether companies follow through with implementation, or if they continue to kick the proverbial can down the road.

Peter Kolaczynski, CommercialEdge Senior Manager

With so many headwinds already facing the office sector, the tech pullback is yet another headache, putting upward pressure on U.S. vacancy rates. An industry that was a major driver of office leasing in recent years is now reversing course, but there are some silver linings. Giants like Apple and Twitter have been leading the return-to-office this year, and tech companies both small and large have eschewed fully remote work, meaning that tech will still be an important demand driver, allowing for a more optimistic office real estate outlook for 2023.

Listing Rates and Vacancy: National Vacancy Rises 110 Basis Points Year-Over-Year

The U.S. office vacancy rate was 16.2% at the end of November, an increase of 110 basis points over the last twelve months and 10 basis points higher than in October. Considering the large scale of layoffs and rapid pace of office downsizing and consolidation in the tech industry — one of the most important drivers of office demand and office use in the past decade — vacancies could rise further, especially in markets with a heavy tech presence. After all, as previously reported, vacancies rose in 86 of the 120 markets covered by CommercialEdge, according to last month’s U.S. office market report.

Top Listings by Metro Area: November 2022

Meta, for example, will take a $2 billion write down to consolidate offices across some of the largest office markets in the U.S., mainly by subleasing space and backing out of lease commitments, including recent ones. For example, in Austin, Meta will look to sublease a 589,000-square-foot space at 400 West Sixth Street, a mixed-use property where it signed a lease in January of this year. In Silicon Valley, it vacated The Village at San Antonio Center, while in NYC Meta is set to give up its footprint at four addresses.

But it’s not just Meta downsizing office footprints: Salesforce will sublease around 40% of its 43 floors at Salesforce Tower in San Francisco, while Lyft plans to sublease about 45% of its presence across New York, Seattle, Nashville and San Francisco.

Price Per Square Foot by Asset Class

At the same time, the average full-service equivalent listing rate was $38.06 in November, down 3.1% year-over-year but up 12 cents over October. That decrease was mostly fueled by negative growth for Class B and Class C spaces, as Class A and A+ office rates were up 1.6% for an average $46.96 per square foot. Specifically, Class B offices recorded a 6.0% decrease for an average rate of $30.30 per square foot, while listing rates for Class C spaces contracted 12.9% year-over-year, closing November at an average $23.05 per square foot.

In terms of location, rates for CBD spaces recorded a 0.2% year-over-year decrease in listing rates for an average of $50.87 per square foot. At the same time, suburban buildings saw listing rates decrease 4.2% year-over-year, closing November at $30.33 per square foot. Urban offices were being leased at an average of $44.70 per square foot following a 4.4% contraction over the past 12 months.

Supply: Office Sector on Track to Surpass 2021 New Start Figures

Nationally, 132.3 million square feet of office space was under construction at the end of October, the equivalent of 2.1% of existing stock. Another 6.3% were in the planning stages, despite continuously weakening office occupancy rates, driven by challenges such as hybrid work, rising costs of capital and a potential looming recession.

Office Space Under Construction & Planned

In fact, the office sector is on track to have more square feet of starts in 2022 than last year, despite cancellations and postponements from large tech players. For example, Amazon halted the construction of new office buildings in Nashville and Bellevue. However, through November, nearly 56 million square feet of new office space began construction. By comparison, in 2021, a total of 58.2 million square feet of space started construction.

Transactions: Average National Sale Price Hovers at $253 per Square Foot

CommercialEdge has recorded $80.4 billion in office transactions through the first 11 months of the year. Of this, Manhattan alone accounted for $5.88 billion and was the only market to surpass $5 billion in sales. However, Boston, the Bay Area, Washington, D.C. and Dallas each recorded more than $4 billion.

Year-to-Date Sales (Millions)

While Atlanta didn’t surpass the $4 billion threshold, its $3.66 billion sales volume still made it stand out as the market is on track to surpass last year’s total of $3.7 billion. Not only that, but it’s also one of the few markets where the average sale price has increased this year. from $211 per square foot in 2021 to $229. However, San Francisco remains by far the national price leader at $940 per square foot. For comparison, the year-to-date average national sale price stood at $253 per square foot at the end of November.

Western Markets: Seattle Pipeline Large Despite Challenges

Despite a slowdown in the tech industry, which makes up an outsized portion of the market's office utilization, the new supply pipeline in Seattle remains substantial. More than 5.6 million square feet are under construction in the Emerald City, 1.3 million of which began construction in 2022. Tech layoffs in the market have been widespread, from giants like Amazon and Meta to real estate tech firms Redfin and Zillow, which will put some downward pressure on office demand and occupancy rates.

Yet, despite job losses in high-profile tech companies, office-using sectors of the labor market in Seattle have grown 6.5% year-over-year according to the Bureau of Labor Statistics. But with a vacancy rate that has increased 140 basis points over the last year and now sits at 18.1%, absorption of this new stock could take a while.

Especially considering that layoffs are being paired with office downsizing: Lyft announced it will sublease about 45% of its office footprint across San Francisco, New York, Seattle and Nashville. Salesforce too is looking to sublease around 40% of its 43 floors at Salesforce Tower in San Francisco — a market still struggling with one of the highest vacancy rates among the country’s top office markets. In fact, its 19.06% vacancy rate is the highest on the West Coast, as is its 4% year-over-year increase in vacancies.

Following close behind San Francisco was Denver with the next-highest vacancy rate (18.71%) and the next-highest increase in that rate (2.66%). The lowest vacancy rate (14.48%) on the West Coast was registered in San Diego which does have a significant life science sector, while the Bay Area — another region with a healthy life sciences industry — recorded the lowest increase in vacancies over the past 12 months at just 0.07%.

Despite its high vacancy rate, San Francisco still commands the highest asking rent on the West Coast. In fact, its $67.03 per square foot rate was second only to Manhattan on a national level. Next up, the Bay Area stood at $55.75 per square foot, followed by San Diego at $43.72 per square foot, maintaining its recently gained lead over Los Angeles, now at $42.09 per square foot.

West Regional Highlights

In terms of sales, the Bay Area remained by far the leader of the West Coast with a sales volume of $4.42 billion, with Los Angeles’ $3.28 billion sales total the next highest. However, San Francisco still commanded the highest year-to-date price per square foot by a vast margin, coming in at $940 per square foot. Seattle’s $550 per square foot rate was the next highest. At the same time, San Diego further stood out, having reached a $448 per square foot year-to-date sale price, surpassing the Bay Area by $6 and Los Angeles by $15.

Midwestern Markets: Chicago & Twin Cities Post Some of the Lowest Asking Rents Among Leading Markets

Chicago continued to have one of the most robust sales markets in the country, closing $3.15 billion in office sales year-to-date. In fact, it closed $270 million in office sales since last month, climbing one position to become the ninth-hottest sales market for office assets nationwide. And it did so with one of the lowest prices per square foot among leading U.S. office markets: Only Philadelphia, Orlando, Houston and the Twin Cities had a lower price than Chicago’s $186 per square foot rate.

Midwest Regional Highlights

The Twin Cities’ $124 per square foot was the lowest sales price among the top 25 office markets, while its $978 million sales volume was also among the lowest nationwide. The Twin Cities also had one of the lowest construction pipelines at 569,500 square feet, with only Tampa’s 343,773-square-foot pipeline lower.

While the Minneapolis – St. Paul market had the equivalent of 0.5% of its existing footprint under construction, Chicago’s nearly 3 million-square-foot pipeline accounted for 1% of its existing stock, with an additional 6.63% in the planning stages. Chicago also had one of the highest vacancy rates nationwide at 19.35%, but that rate has increased very little over the past 12 months, rising only 0.33%.

Asking rates have been on the rise in the Windy City, but Chicago’s $27.89 per square foot listing rate was one of the lowest among the country’s top markets. The same was true for the Twin Cities’ $26.13 per square foot rent rate.

Southern Markets: Austin Market Strong Despite Rising Vacancies

Austin has been the fastest-growing office market in the country since the start of the pandemic, with office-using sectors of the labor market adding 85,000 jobs (an increase of 28%) in the last 30 months. Developers have responded to this growth, with more than 3.1 million square feet of new office space, representing 3.6% of stock, completed this year alone.

With deliveries hitting the market at this pace, the 100-basis-point increase in vacancy rates over the past 12 months appears minor. The same can be said about Meta’s downsize in this hot office market: The tech giant will look to sublease a 589,000-square-foot space at 400 West Sixth Street, a mixed-use property where it signed a lease in January of this year.

South Regional Highlights

Despite being one of the strongest office markets in the country, Austin’s average full-service-equivalent listing rate has fallen 3.3% over the past 12 months. This was in part due to numerous listings hitting the market at a rate lower than the market average, bringing Austin’s average asking rate to $41.81 per square foot. But Austin also had the largest supply pipelines in the country on a percentage-of-stock basis, with the equivalent of 8.8% under construction. Not only that, but planned projects would further increase its stock by 22.8%.

Atlanta too, stood out from the pack when it comes to office sales in 2022. Not only is the market on track to surpass last year’s sales volume of $3.7 billion but it is one of the few markets where the average sale price has increased this year, rising to $229 from $211 per square foot in 2021. The sale of the 1.3 million-square-foot Bank of America Plaza — a 55-story tower that is an iconic part of the city’s skyline — has been the largest this year.

Nashville is also among the cities with notable tech downsizing. Specifically, Amazon halted construction of a new office building in Nashville, while Lyft’s 45% sublease of its footprint will also include space reductions in Music City. Currently, Tennessee’s top office market has a vacancy rate of 17.80%, having inched down just 0.11% over the past year. At the same time though, asking rents rose a little over 3% year-over-year, bringing the average rate to $31.20 per square foot.

Meanwhile Miami continued to see rapid increases in office rents, with its average asking rate reaching $49.62 per square foot for the priciest market in the South. Austin and Washington, D.C. were the next priciest markets in the region with average rents of $41.81 per square foot and $41.53 per square foot, respectively.

Washington, D.C. also stood out in terms of sales: At $4.29 billion, the capital had the largest sales volume in the South and the fourth-highest nationwide. Dallas and Atlanta followed close behind with sales volumes of $4.16 billion and $3.66 billion, respectively. In fact, Dallas had the fifth largest office sales volume nationwide, having reached that position with one of the lowest prices per square foot. Its $187 year-to-date sales price outperformed only Chicago, Philadelphia, Houston, Orlando and the Twin Cities.

Northeastern Markets: Meta Downsize Targets Four Manhattan Office Buildings

The ongoing tech downsize was bound to also make its presence felt in the Northeast, specifically New York City. Lyft is set to cut its office footprint by 45% across four cities, including NYC, while Meta is looking at reducing its footprint at four addresses by subleasing space and backing out of lease commitments.

In fact, the tech giant said on its third-quarter earnings call that it will take a $2 billion write down to consolidate offices across multiple locations in the U.S. In Manhattan, the firm has backed out of a 300,000 square-foot commitment at 770 Broadway, vacated its space at 225 Park Avenue, and will not renew leases at two buildings in Hudson Yards.

Manhattan closed November with a vacancy rate of 14.83%, having risen 3.46% over the past 12 months, while Brooklyn stood at 17.70%. New Jersey too had a similarly high vacancy rate at 17.47%, while its average asking rent stood at $32.99 per square foot, having slipped 0.54% year-over-year.

Boston, as one of the markets with the lowest vacancy rates on the East Coast, closed November at $37.52 per square foot after inching up 0.36% year-over-year. Manhattan, of course, still commands the highest asking rents in the U.S. at $74.73 per square foot, but rates have continued to slip, coming in 4.27% below year-ago levels.

Northeast Regional Highlights

Despite high vacancy rates, Manhattan developments are still continuing: More than 15 million square feet of office space are under construction, the equivalent of 3.4% of its existing stock. Another 5.9% were on the drawing board at the end of November. Boston had a similarly large development pipeline at more than 13 million square feet, which will increase the city’s office footprint by 5.6%. And if all planned projects materialize, Boston will add the equivalent of another 11.8% of space.

Boston also performed well when it came to sales, closing $4.66 billion in office sales year-to-date for the second-highest volume nationwide. It was, of course, surpassed only by Manhattan’s $5.89 billion sales volume. Manhattan achieved that figure with a year-to-date price per square foot of $828, surpassed only by San Francisco’s $940 rate.

And while Brooklyn had one of the lowest sales volumes among leading office markets with a total of just $767 million, it still commanded one of the highest prices at $532 per square foot. Meanwhile, New Jersey had the seventh highest sales volume nationally, with its $3.41 billion total surpassing Los Angeles, despite having a much lower price per square foot: $231 versus $434.

Office-Using Employment: Job Growth Cools in Office Sectors

Office-using sectors of the labor market added 39,000 jobs in the month of October. The three sectors have seen growth slow in recent months after starting the year strong. Between January and July, more than 108,000 office jobs were added per month on average. August through October, the average has been slightly north of 41,000.

Metro employment data for September, which trails the national release, shows the Sunbelt leading the way in office jobs growth, with Dallas increasing 8.0% over the last year, Atlanta 7.7% and Charlotte 7.2%, Austin 6.2% and Nashville 5.7%. Gateway and tech-centric markets have also seen large gains year-over-year with San Francisco growing 7.0%, Seattle 6.5%, New York 5.8% and Boston 5.0%.

Office-Using Employment Growth by Sector

However, unlike the Sunbelt markets at the top of the list, gateway markets have been slow to recover jobs lost to the pandemic, finally surpassing February 2020 levels of employment this year, whereas the Sunbelt markets have long since recovered and continued to grow in 2022.

At the same time, however, layoffs in the tech industry have been widespread, even as other sectors of the labor market have added workers. According to Layoffs.fyi, more than 130,000 tech layoffs have occurred across nearly 1,000 tech firms since the second quarter. The list of companies with large-scale layoffs this year reads like a who’s who of last decade’s tech darlings. Among the biggest names, Meta is laying off 11,000 employees, Amazon is dropping 10,000 and Twitter has cut more than half of its staff. Uber laid off more than 3,000 and Snap is planning to let go a fifth of its workers.

With so many headwinds already facing the office sector, the tech pullback is yet another headache. An industry that was a major driver of office lease in recent years is now reversing course, but there are some silver-linings. Giants like Apple and Twitter have been leading the return-to-office this year, and tech companies, both small and large, have eschewed fully remote work, giving space for a brighter office market outlook. Long term, laid-off tech employees may find new businesses that drive office demand in the later half of this decade, much like they did in the rebound from the Great Financial Crisis.

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 have 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.

The post Tech Sector Downsize Further Challenges Office Recovery   appeared first on CommercialEdge.

• The average U.S. office listing rate stood at $37.94 per square foot, down 0.1% year-over-year
• Up 150 basis points year-over-year, the national vacancy rate rested at 16.3%
• Under-construction office space totaled 135.5 million square feet in October
• $76.3 billion in office sales were closed in the first 10 months of the year
• At $940 per square foot, San Francisco claims highest office sales price in the U.S.
• Midwest posts lowest office sales price with Twin Cities’ $123 per square foot
• Atlanta and Houston post highest vacancy rates, with both north of 20%
• Manhattan still leads asking rents with $74.75 per square foot

Although many industry players and occupiers hoped for 2022 to be the year when the office market levels out and maybe even starts to recoup pandemic losses, that stabilization did not materialize. Wider economic shifts, the Federal Reserve’s repeated interest rate hikes, the further solidification of work from home and office setups and increasing office footprint reductions by companies meant that vacancy rates continued to rise throughout the year, while rent growth remained patchy.

Work-from-home solidifying itself, plus broader economic uncertainty, are set to continue the stress on the office industry as we enter the new year.

Peter Kolaczynski, CommercialEdge Senior Manager

Listing Rates & Vacancy: Listing Rates Register Significant Growth Only in Select Market

With large swaths of the office-using sector embracing remote and hybrid work at least partially, demand for office has continued to decline in most markets since the onset of the pandemic.  Not only that, but many companies have already reduced their office footprints, while others have concrete plans to do so in the near future.

As a result, the national vacancy rate was 150 basis points higher than in October 2021, closing last month at 16.3%.

In fact, over the past 12 months vacancy rates rose in 86 of the 120 markets covered by CommercialEdge, including in 22 of the 25 most important ones. Of the leading U.S. office markets, the sharpest vacancy rate increases were recorded in Portland (+400 bps) and San Francisco (+390 bps). On the other end of the spectrum, only three of the country’s 25 leading markets saw vacancies decline during the same time period: Boston, Charlotte and Washington, D.C.

Top Listings by Metro Area: October 2022

Across the top 50 U.S. office markets, the average full-service equivalent listing rate stood at $37.94 in October, down 0.1% year-over-year. Considering the significant vacancy declines recorded in Charlotte and Boston, it was to be expected that the two markets would also have some of the most robust listing rate growths in the U.S.

Specifically, the increase in Charlotte’s and Boston’s listing rates were among the three highest in the U.S. In fact, Charlotte and Boston were two of only four markets where listing rates appreciated by double digits over the past 12 months, joined by San Diego and Miami. Growth in these locations was driven by robust life science sectors and increases in in-migration of workers and companies to Sunbelt markets.

Supply: Sunbelt Adds Space as Firms Seek Headquarters

Nationally, 135.5 million square feet of office space was under construction at the end of October, the equivalent of 2.1% of existing stock. Another 6.1% are in the planning stages, but it remains to be seen if they will indeed materialize considering the increased cost of construction materials, supply chain issues, the significant interest rate hikes handed down by the Fed, the increased cost and difficulty of financing and a potential recession.

Although office construction is nowhere near pre-pandemic levels, development has continued over the past 30 months. With the overwhelming majority of office projects that broke ground before the pandemic having been delivered, 80% of the current construction pipeline consists of developments that kicked off after April 2020. Much of the current national construction pipeline is driven by occupiers’ flight to quality and by companies relocating to or expanding into Sunbelt markets.

Specifically, of the 135.5 million square feet of office space currently under construction, 125.7 million square feet are represented by A and A+ projects, with class B spaces accounting for less than 10 million square feet.

Asset Class Price Per Square Foot

Driven by heavy migration into the region over the last few years, Sunbelt markets — especially in the Southeast — have been among the most active when it comes to new office development.

Charlotte and Miami have especially attracted firms looking to relocate or expand, with the former breaking ground on the equivalent of 7.4% of its stock since the start of this year alone. Although some projects have been scrapped over the past few months, the city’s development pipeline is second only to Austin, a market where office is undergoing a veritable boom, with projects currently under construction set to increase its footprint by 8.1%.

Transactions: National Sales Volume Surpasses $75 Billion

CommercialEdge has recorded $76.34 billion in office transactions between January 1 and October 31. Of this, Manhattan sales represented $5.56 billion, while the Bay Area, Boston, New Jersey and Washington D.C. totaling about $4.1 billion in sales each.

Four more markets surpassed $3 billion in sales, with some expected to surpass the $34 billion marker before the year is out. Among them is Dallas, which had a year-to-date sales volume of $3.94 billion at the end of October. Overall, of the country’s leading 25 office markets, only four had sales volumes under $1 billion.

Year-to-Date Sales (Millions)

Among the hottest office markets for transactional activity, Boston has been the third most active market this year by sales volume, largely driven by life sciences. The two largest transactions in the market were in Kendall Square, both with life science elements. Alexandria sold 70% of its stake in 100 Binney, a recapitalization that valued the building — with tenants like Meta and Bristol Myers Squibb alongside biotech firms — at more than $1 billion. Down the street, Biogen sold its property at 300 Binney for $603 million to Boston Properties in a sale-leaseback.

Although Boston and the Bay Area posted year-to-date sales prices of over $400 per square foot and Manhattan at well over $800 per square foot, the national year-to-date price per square foot clocked in at $261.

Western Markets: San Francisco Remains Priciest Sales Market

San Francisco continues to lead western markets in terms of asking rents, posting a rate of $66.75 per square foot in October — more than double the national average. While asking rents remained unchanged month-over-month, San Francisco’s vacancy rate declined a minute 0.18% compared to September figures. However, year-over-year, the local vacancy rate increased nearly 4%, resulting in a 19.5% vacancy rate at the end of October.

In terms of rent rates, the Bay Area followed with $55.64 per square-foot, up a near-negligible 0.04% year-over-year. But vacancies rose 0.30% during the same timeframe, bringing the Bay Area’s vacancy rate to 16%.

San Diego’s life sciences sector continued to keep asking rents higher than those in Los Angeles. Specifically, double-digit rent growth in San Diego brought rents to a $43.91 per square foot asking rate, while Los Angeles stood at $42.70 per square foot. Moreover, as vacancies in Los Angeles rose nearly 2% year-over-year, San Diego’s 1.16% increase allowed the city to post a lower vacancy rate of 14.53%, the lowest among leading Western markets.

At the same time, Denver was second only to San Francisco in terms of vacancies, with Colorado’s main office market at 18.48%. Asking rents were also declining, decreasing 0.92% year-over-year to close October at $30.02 per square foot. However, this was one of the highest rent rates in the West outside California, with Seattle’s $37.18 per square foot, the highest.

West Regional Highlights

San Francisco was the leader of sale prices as well, posting a $940 per square foot sales price for the first ten months of the year — the nation’s highest. Its closest rival was Manhattan with a price per square foot nearly $100 lower. Seattle sported the West’s second-highest sale price at $573 per square foot, followed by the Bay Area’s $442. Conversely, at $191 per square foot, Portland had one of the lowest sales prices rates among the country’s top office markets.

In terms of sales volumes, the Bay Area led Western markets with $4.18 billion in office sales year-to-date, followed by Los Angeles with $3.1 billion and Denver with $3.03 billion.

Midwestern Markets: Twin Cities Post Lowest Sales Price of the 25 Top Office Markets

Although Chicago had one of the more robust sales markets earlier this year, transactional activity slowed somewhat. Thus, Chicago had the tenth largest sales volumes in the U.S. at $2.88 billion. But the Windy City also had one of the lowest prices per square foot among the country’s 25 most important markets, with its year-to-date sale price at $198 per square foot.

However, the Twin Cities actually had the lowest sales price among the top U.S. office markets, closing October at $123 per square foot year-to-date. The Minneapolis – St. Paul market was also one of five of the country’s top markets where sales had yet to reach $1 billion, totaling $840 million over the first ten months of the year.

The Midwest’s two leading markets also had some of the smallest construction pipelines in the U.S. on a percentage-of-stock basis. Chicago was developing the equivalent of just 1% of its existing footprint at the end of October, while the Twin Cities were expanding by a mere 0.5%. In fact, the Twin Cities’ under construction pipeline was also among the smallest overall, even in terms of square footage, with just 569,000 square feet worth of development with shovels in the ground.

Midwest Regional Highlights

Asking rates in the two markets were fairly close in value, although Chicago still stayed ahead at $27.55 per square foot, down 0.11% year-over-year. Rents in the Twin cities declined at a sharper rate, pulling the local asking rent down to $25.62 per square foot. These were, in fact, some of the lowest asking rents among the country’s top office markets, with only Orlando’s $23.67 per square foot lower.

As for vacancies, Chicago’s 19.74% was the country’s third-highest office vacancy rate, up 1.19% over year-ago figures. Vacancies may have been lower in the Twin Cities, but here too, the trend was one of declining occupancies.

Southern Markets: Houston and Atlanta Vacancy Rates Highest Among Leading U.S. Office Markets

Vacancies rose in the South too, with Houston undergoing the sharpest increase that also resulted in the highest vacancy rate across the U.S. at 25.16%, while Atlanta’s 21.08% was the second highest. However, the South also posted some of the lowest vacancy rates nationwide with Charlotte’s 12.50% and Miami’s 12.72%.

Similarly, Charlotte and Miami, joined by Orlando, also logged some of the highest rent increases over the past 12 months. Other leading markets in the South registered milder decreases, like Houston’s 0.71% decline, or logged small increases in asking rents, such as Nashville’s 0.21% or Atlanta’s 2.51%.

South Regional Highlights

Sale prices in the South could not compete with those of leading Western and Northeastern markets. Miami claimed the highest rates at $390 per square foot year-to-date, followed by Austin’s $387 per square foot and Charlotte’s $322 per square foot. Conversely, some of the lowest sales prices were also logged in the South as Houston’s $160 per square foot and Orlando’s $177 per square foot rates among the three lowest.

But large sales volumes were still reached in the region: Washington, D.C. totaled $4.11 billion in year-to-date sales for the fifth highest sales volume. It was immediately followed by Dallas and Atlanta with sales totals of $3.94 billion and $3.45 billion. And, despite one of the lowest prices per square foot among the country’s leading office markets, Houston still amassed a $2.46 billion total volume. On the other hand, Tampa and Orlando had two of the five lowest sales volumes, logging $769 million and $581 million, respectively.

Northeastern Markets: Manhattan’s Asking Rents Highest in the Country

Nationally, Manhattan, Boston and New Jersey had three of the five most robust sales markets, with all three closing more than $4 billion in office transactions year-to-date. Manhattan remained the national leader and the only market to go north of $5 billion, reaching a total sale volume of $5.56 billion. At the same time, Boston had the third-largest sales volume at $4.18 billion and New Jersey totaled $4.13 billion, the fourth largest.

On the other end of the spectrum, Brooklyn was one of five leading markets where year-to-date office sales remained under $1 billion, totaling $767 million. While Philadelphia inched over that threshold to reach $1.1 billion in office sales, it had one of the lowest year-to-date sales prices at $190 per square foot. Conversely, Manhattan remained one of the most expensive office markets, with assets trading at $845 per square foot, the second-highest rate, while Brooklyn’s $532 per square foot sale price was the fourth highest.

Northeast Regional Highlights

Manhattan asking rents remained the most expensive across the country at $74.75 per square foot. Although Manhattan rates were trending down, barring any radical market shifts, it will likely remain the priciest office market for occupiers for some time yet. While Brooklyn rates trended down overall, Boston’s life science market helped lift rents over the past 12 months. Thus, the market closed October at $40.20 per square foot, almost on par with Austin and Washington D.C.

And although New Jersey commands some of the highest industrial rents in the U.S., office rates here were on the lower end of the pricing scale at $33.15 per square foot. Philadelphia was not far behind at $30.76, but in terms of vacancy rates, it had one of the lowest at 14.22%, with only Boston’s rate lower on the Eastern seaboard. Manhattan’s vacancy rate stood at 14.62%, rising 3.5% year-over-year. Brooklyn also underwent a comparable increase in vacancies, but closed October at nearly 20% vacant.

Office-Using Employment: Finance Wage Growth Lags Other Sectors

Office-using sectors of the labor market added 46,000 jobs in October, increasing 3.6% over the last 12 months, according to the Bureau of Labor Statistics. Year-to-date, office-using sectors have added a total of 910,000 jobs.

After increasing rapidly in the first half of 2021 — peaking at 7.8% year-over-year in March — wage growth in the financial activities sector has withered in the last 18 months. In October, the average wage in the financial activities sector grew just 3.8% year-over-year. This is below the wage growth in the overall labor market (4.7%) and two other office-using sectors, with the information sector increasing 6.4% and professional and business services growing 5.0%.

Wage growth is likely to continue across all sectors in the near term because, despite recent gains, inflation-adjusted wages have fallen this year, with the consumer price index sitting above 8.0% for many months. A tight labor market will necessitate further increases if employers wish to attract and retain talent.

Office-Using Employment Growth by Sector

Trends & Industry News: Rate Increases Another Challenge for Office

In an effort to combat inflation levels not seen in nearly 40 years, the Federal Reserve has raised interest rates 375 basis points since March. For an office market already facing the headwinds of remote work and corporate downsizing, rate increases have added another challenge that will hinder the new-supply pipeline and transaction deal flow.

On top of volatility in material costs and labor shortages, increasing debt costs make deals for new office supply increasingly difficult to pencil out. Build-to-suit or pre-leased properties will still get financing, but not much else. We expect some office projects to be paused or canceled in 2023 as the market adjusts to the new conditions.

Some developers may even look at alternative uses for plots of land they are developing. Last month, CIM Group submitted paperwork to build a 46-story apartment property in downtown Oakland where it had previously planned to construct an office tower.

Lenders are becoming more selective given market conditions, and when they do originate loans for commercial real estate, the multifamily and industrial sectors are preferred over office. Buyers are now looking for discounted prices, but so far sellers are hesitant to reduce them. The bid-ask spread on office properties will likely grow in coming months and deal flow could slow to a trickle.

Sales Price Per Square Foot

For investors that have recently reached the end of their hold period, it is an especially tricky time. While some may be tempted to hold and reassess until rates decrease, that may take a few years, and owners may be holding onto properties with worse lease situations than they have today.

Some of these challenges may ease when inflation cools, and rate hikes taper off. Right now, investors, developers and debt markets are unsure how far the Fed will go with rate increases and when a recession may hit. Once rates stabilize, deal flow and loans for new construction may increase as investors and developers have more certainty about debt costs.

However, by that point the federal funds rate may be higher than it has been in two decades. Combined with the other challenges impacting the office sector since the onset of the pandemic, we expect that deals may only get done for well-positioned, high-quality assets. Additionally, we expect an increase in office space in mixed-use properties as a means to diversify income streams and reduce risk.

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.

The post Office Vacancy Rates Continue to Climb Across the Country in 2022 appeared first on CommercialEdge.

While the mass exodus of office occupiers that some feared in the early days of the pandemic did not materialize, even the most optimistic industry players agree that the next three to five years will remain fluid and challenging. Beyond that though, the variety of opinion on where the sector is headed is vast.

More bullish decisionmakers believe that the economic downturn and the inevitable increase in unemployment will hand power back to employers to enforce a full return to the office. Others believe companies will look to cut expenses by giving up large parts of their footprints. Others yet point to the current wide spectrum of hybrid work set-ups as a new normal.

Hybrid Consensus

Although some voices still predict a full return to the office, the wider consensus is that hybrid work is here to stay for the foreseeable future. While nuances differ from company to company, the overarching sentiment is the need for a home base, with 86% of tenants believing in the ongoing necessity for a physical office space, according to the 2022 BOMA International COVID-19 Commercial Real Estate Impact Study which surveyed more than 1,200 space decision-makers.

Additionally, 60% of employees and employers favor a partial return to the office with an average of 3.5 days per week. But reacquainting workers with the office environment is proving more challenging than most industry players expected. Also, a large contingent of workers simply favor a telework setup for the increased work-life-balance it offers, reduced commute times and expenses, as well as the opportunity to live in more affordable housing markets.

However, the wider consensus within the industry is the need for each company to take an individual approach. After all, the past two plus years proved that successful telework is most influenced by the role of an employee, rather than the location, industry, or the company itself.

The Need for Individual Approach

It is precisely this need for flexibility that has spurred the reemergence of the coworking sector after the hits taken during the pandemic. Not only are employees choosing to work in coworking environments, but corporate presence in the industry has also surged. While the nearly 118 million square feet of coworking space that CommercialEdge estimates to exist nationwide represent only 1.7% of all office space, the sector is expected to grow, and not just in the short term.

But changes in the industry go far beyond the growing interest in coworking. New lease contracts are increasingly foregoing the traditional 10-year term in favor of three-to-five-year terms. And while 75% of office decision-makers plan on renewing leases, nearly the same number are reevaluating their needs. Of those, half lean towards reducing footprints and just a little over one-third plan to increase it.

Occupancy variations have also become tied to industries, regions, location and building class. Occupiers of Class A space over 5,000 square feet place the highest importance of maintaining an office hub. But occupiers with the largest footprints and highest rents are the ones increasingly reevaluating space needs, especially in the Northeast, California and Texas. At the same time, office occupancy as well as new project starts remain highest in Sunbelt markets.

The latest CommercialEdge data shows that right behind the Bay Area, Boston and Manhattan, Austin and Dallas had the largest development pipelines in terms of square footage. Furthermore, Charlotte and Nashville, along with Austin, had the largest pipelines in terms of percentage of stock.

Office As Destination, Not Obligation

Net absorption turned positive this year, but there is a sharp demarcation line between building classes.

High-quality spaces, especially new buildings with the latest amenities experienced rent growth in both 2021 and 2022, while Class B and C assets are facing increasing vacancies, decreasing lease rates and little new development.  CommercialEdge data shows that A and A+ projects under construction totaled 129 million square feet at the end of Q3, whereas Class B developments accounted for just 9.7 million.

Location is also playing an important role in the performance of office properties, with much of the surge in office vacancy rates originated from CBD assets. Conversely, suburban properties have remained more stable, with lower declines in vacancy rates. Specifically, the latest figures show an 18.3% vacancy rate for CBD assets and 16.2% for suburban properties.

It is essential, however, to emphasize that this stems not from a flight to suburban offices but is pushed on by flight from downtown cores. That trend is also evidenced by under-construction pipelines and planned developments. New CBD developments totaled 25 million square feet at the start of Q4, while suburban starts stood at nearly 52 million square feet and urban projects outside CBDs were set to add 62 million square feet.

Office Enters Its Service Era

With the flight to quality not expected to let up, office amenities have started going from fitness centers, catering and outdoor spaces to a range of services like concierge setups. The demand for top-tier office spaces and their increasing rent rates suggest that the most fundamental change for the industry might be that office environments are no longer simply locations and products — instead they have become a service.

This shift in the way office spaces are perceived and lower usage rates have led to even the most optimistic outlooks to expect a decrease in demand of at least 10% — a figure that could go as high as 25%. The most likely spaces to take that hit will be where owners and operators are unwilling to or unable to upgrade and quickly realign with new usage trends, especially since rent growth is expected to remain weak while operating costs continue to rise.

Companies should make the workplace a destination instead of an obligation.

That in turn has upended cap rates. Rising interest rates, risk premiums and debt costs have softened both the volume and price of office transactions overall. Exceptions to this outlook are expected to be niche sectors, like the life sciences sector, which has kept markets with significant such footprints ahead of traditional gateway markets.

Where Next: Conversions and Rediscovering Customer Needs

While early voices did predict a significant increase in office-to-housing conversions, that trend too failed to materialize. Although many of the largest office markets in the country would be open to such projects, such adaptive reuse projects will likely be few and far between, since each potential office conversion must be treated on a case-by-case basis, which already increases the cost of conversions.

Further major roadblocks include the simple fact that most office buildings have floor plates that are incompatible with residential needs. Furthermore, demand, local attitudes (such as NIMBYism), regulations, tax and incentive packages all must fit in just the right way for conversions to be feasible. Not only that, but the costs of financing as well as acquisition prices need to soften enough to make them profitable. Few notable cities have managed to successfully readapt large, concentrated amounts of office space and those that did, required heavy support from the public sector.

For office owners and investors with an eye to future profitability, it seems more crucial than ever to truly understand all ongoing changes, face the fault lines within the sector and act. The pandemic may have brought on a host of specific challenges, but it also exposed and exacerbated existing pain points in the industry.

After all, densification, shrinking spaces and suboptimal seating setups pushed worker dissatisfaction to new heights in 2019. As one industry analyst framed it: “Any real estate investor that is not taking seriously the possibility that the market is being fundamentally upended is going to get a real shock. Office owners must understand the customer like never before; if not, they will have a problem.”

The post The Future of Office 2023: Clarity, Adjustments and Emerging Trends appeared first on CommercialEdge.

Drawing on the responses of more than 1,200 office space decision-makers and influencers, the report reveals a shifting marketplace as corporate office tenants reevaluate their perceptions of office usage. Along with stabilizing attitudes, another key finding addresses the growing importance placed on in-person office setups — however, these are expected to look notably different compared to pre-pandemic times.  

This third U.S. tenant sentiment study from BOMA International, Yardi and Brightline Strategies aims to provide a comprehensive overview of the pandemic’s wider impact on CRE, tenants’ shifting attitudes regarding the physical work environment and to discover opportunities for commercial operators who are committed to redefining the future of the office.

The Importance of Physical Office Space  

Tenants are placing a higher value on physical office space despite the long-lasting impact of COVID-19 on the sector. A notable 86% of tenants nationwide responded that office space is or will be essential for running a successful business, marking an 8% increase from 2021 figures. The importance of office space was highest among Class A tenants (90%) and those occupying more than 5,000 square feet.  

A recurring theme is having a “home base” community for connection, which includes space for larger group gatherings, as 78% of respondents believe that having a location for client and customer interactions is fairly to very important.  

Lease renewal intensity has returned to pre-pandemic levels in the summer of 2022. While 72% of respondents intend to renew their leases, 54% prefer a shorter lease term of 3 to 5 years rather than the 7-to-10-year pre-pandemic standard.  

Occupancy Shifts and Return-to-Office Trends  

Regarding “go forward” planning and a focus on safety, 76% of respondents said that their coworkers and employees generally favor returning to their physical office spaces. And 78% of coworkers and employees speaking for themselves stated that they are comfortable with going back to the office. This finding indicates a stabilization in health concerns and better alignment on COVID-19 safety attitudes than in earlier surveys.  

On the other hand, 60% said that reacquainting employees with the in-person office setting might be challenging, which slightly tempers the return-to-the-office enthusiasm.  

Remote and Hybrid Work Model Preferences  

While support for the value of in-person office space has grown compared to previous years, positive sentiment toward telework has also increased year-over-year, reaching 55%. Tenants who pay the highest rent per square foot remain the most supportive, while smaller tenants tend to be less supportive of the work model.  

Managers and their employees tend to agree on the ideal hybrid work schedule, with 61% of managers supporting at least three to four days per week in the office, in line with 60% of general office employees. Regarding the idea of 100% remote work, only 16% of employees said they would support it, while another 10% would prefer working closer to home in a company-provided workspace. Of the organizations that responded, 29% said they will move toward mostly or full-time telework in 12 to 19 months, marking a slight uptick from 26% in 2021.  

Family obligations, commute times and costs, and the overall health benefits of remote work are the main reasons employees prefer it. Workers not liking their office buildings or suites, the locations their workplaces are situated in, and inadequate amenities were among the lowest-ranked factors, indicating that convenience is more important here than the quality of the office environment.  

On a regional level, support for remote work has increased considerably in California and the Northeast, while the Southwest has seen the most significant decline.  

Reevaluated Square Footage Needs  

Most of those surveyed (70%) said they will reevaluate their office space needs, while another 14% are still determining their reassessment plans. California, Texas and the Northeast were among the regions where the likelihood of reevaluating space increased significantly, joined by tenants paying the highest rents per square foot and those with the largest footprints.

Respondents revealed that reassessment plans will be based on factors such as pandemic impacts, rising telework trends and decreasing revenues. While more than half (51%) are leaning toward reducing their footprint, 36% are thinking of expanding or maintaining their current office square footage.   

Of those with space reduction intentions, 67% chose increasing remote work/telework as a significant factor. In contrast, the high cost of office space and the overall elevated cost of doing business was a concern for 71% of respondents.   

Amenity-Oriented Tenant Expectations    

In terms of amenities that would incentivize remote and hybrid employees to return to the office, 78% would prefer an approach “beyond the status quo of typical amenities.” Hence, adapting offices for remote and hybrid workers was a top priority for tenants. Professional development events, commuting incentives such as stipends and parking reimbursements, and more social events were among the most popular changes planned. 

And when it comes to the value of office space, 73% of respondents emphasize the importance of social connection. In addition, the majority (75%) stated that having a physical workspace that encourages innovation and new ideas while also providing the necessary space and technology for collaboration is fairly to very important.  

Conclusions  

The 2022 BOMA International COVID-19 Commercial Real Estate Impact Study found that both employers and employees value the physical office environment. In addition, the research has brought new clarity to pandemic-related responses and lease renewal intentions, tenant sentiments regarding COVID-19, its effects on businesses, and their viewpoint on in-person office workspace and office space decisions going forward. The findings pave the way for the reinvention of the office workplace, providing owners and operators with opportunities to transform the office environment in accordance with current tenant preferences and expectations.   

The post BOMA Study: Office Tenants, Owners and Managers Pivot Toward Reimagined Work Environment  appeared first on CommercialEdge.

• The average U.S. office listing rate stood at $37.67, ticking down 2.4% year-over-year
• Up 180 basis points year-on-year, the national vacancy rate rested at 16.6%
• Under-construction office space totaled 139.1 million square feet in September
• $69.3 billion in office sales were closed in the first three quarters of the year

Office starts are undeniably below pre-COVID levels, but the dramatic crash predicted by some has not occurred so far: 46.6 million square feet of new office space broke ground this year, with the expectation that 2022 will match last year’s 62 million square feet of new stock brought to market.  

However, as the office sector rebalances to post-pandemic conditions, new developments exemplify the ongoing geographical and property class shifts in the sector. Gateway markets such as San Francisco, Washington, D.C., and Chicago are adding new office space at a noticeably slower pace, while Sunbelt markets continue to experience only moderate decreases or a veritable office boom:  new and planned office starts in Austin, Charlotte and Nashville will increase local stocks by 15% to 23%. 

Additionally, CBDs are no longer the preferred location for new starts, supplanted by urban projects outside the central core. Specifically, under construction and planned office projects in CBDs will increase the national stock by 4.3%, while urban starts will add the equivalent of 13%. 

The vacancy rate for September stood at 16.6% and will likely rise as fewer leases are renewed. But even so, new office developments continue to break ground as the flight to quality proceeds to intensify. Class A and A+ office starts totaled 130 million square feet at the end of the first three quarters of the year, while Class B accounted for less than 10 million. 

Listing Rates and Vacancy: Trophy Tower Drives Miami Listing Rate Growth

While the office market readjusts to tenants’ flight to quality and the imbalance between diminished demand versus excess availability of space, vacancies continue to rise at the national level, while listing rates slip. Specifically, across the top 50 U.S. office markets, the average full-service equivalent listing rate was $37.67 in September, down 2.4% year-over-year. 

At the same time, the national vacancy rate was 180 basis points over September 2021, closing the month at 16.6%. 

While average listing rates have fallen and vacancies have spiked in many markets over the last year, that is not the case in Miami. Fueled by the relocation of firms and workers to Florida during the last two years, the city sports a 12.1% vacancy rate, while its average listing rate has risen 12.4% over the last twelve months.

Listings by Metro Area: October 2022

The property pushing up rates the most in Miami is 830 Brickell, a 57-floor trophy tower set to deliver before the year is out. Currently the building is listing more than 185,000 square feet, with full-service leases priced from $83 to $150 per square foot. The building has already inked leases with a variety of tenants, from international law firms and asset management companies to Microsoft, which will make the space its new regional headquarters.

Supply: Office Starts Fall in Gateway Markets

Nationally, 139.1 million square feet of new office supply are currently under construction.

In 2022, 46.6 million square feet of new office space have started construction, and the year is on pace to match 2021’s 62.2 million square feet. While the new supply pipeline will not produce starts at pre-pandemic levels — routinely north of 80 million square feet annually —anytime soon, office starts have not dropped coming out of the pandemic as much as expected.

Office Space Under Construction (Million Sq. Ft)

Since COVID-19 began, the geographic composition of office starts has shifted and gateway markets have recorded the largest declines.

Office Space Under Construction & Planned

In 2019, Los Angeles had 3.6 million square feet of starts, but this year only 61,000 square feet of non-owner-occupied office space has begun construction. Chicago started 1.0 million square feet year-to-date in 2022, compared to 5.0 million three years ago. New projects in Manhattan have declined from 3.2 million square feet to just 754,000 this year, while Washington, D.C.’s volume has dropped from 4.7 million square feet to 1.1 million.

National New Supply Forecast

By contrast, starts in Sunbelt markets with high levels of in-migration are relatively unchanged. Austin’s new office development has increased from 5.1 million square feet in 2019 to 5.8 million this year. Other major Sunbelt locations are recording only slight declines.

Transactions: Manhattan and Washington, D.C., Leads Sales Volume

CommercialEdge has logged $69.3 billion of sales through the first three quarters of 2022.

Year-to-Date Sales (Millions)

The Washington, D.C. market has been one of the most active in 2022, with $4.1 billion in volume, nearly equaling the $4.5 billion in sales recorded in each of the previous two years. The highest-priced asset in the market so far — by both total cost and price per square foot — is 601 Massachusetts Ave. NW, a 478,818-square-foot property that traded for $531 million ($1,109 per foot). The amenity-laden building in the Seventh Street Corridor was delivered in 2015 by Boston Properties, which sold the building to Mori Trust.

Year-to-Date Sale Price Per Square Foot

Asset Class Price Per Square Foot

Quarterly Transactions (Billions)

Quarterly Transactions Price Per Square Foot

Western Markets: San Diego Office Rents Outpace Los Angeles

San Francisco continues to lead western markets in terms of asking rents, posting a rate of $66.75 per square foot in September — more than double the national average —as the result of a 3.3% Y-o-Y increase. The Bay Area followed with an average rent of $53.93 per square-foot, after rents contracted 2.8% compared to the year-ago rate of $55.46 per square-foot, while vacancies rose 0.11% during the same timeframe.

And while Los Angeles office rents have been historically higher than San Diego rates, rankings have been upended by current market conditions, most likely influenced by the San Diego office market’s increased resilience due to its life sciences sector. Thus, San Diego closed September with a $43.91 per square foot rate, while Los Angeles clocked in at $43.06 per square foot.

Further up the coast in the Pacific Northwest, Seattle continued to post higher asking rents than Portland, with rates coming in at $36.79 per square foot and $30.09 per square foot, respectively. And while Seattle office rates came in over year-ago rates, in Portland rates slipped 0.9% below year-ago figures. Rents for Denver office space also trended up, albeit at a modest 0.6% year-over-year, resting at $30.14 per square foot.

West Regional Highlights

In terms of new supply, both Seattle and the Bay Area had the equivalent of 4.5% of their existing stock under construction, with Seattle set to add 18.8% and the Bay Area 5.3% when taking into account planned projects. San Diego came next with under construction office projects accounting for 4.3% of its stock, with its pipeline rising to 9.9% when considering planned developments as well. Other major Western office markets’ under construction projects accounted for less than 4.0% of their stock, with Portland’s pipeline at a mere 0.7%.

From a transactional perspective, the Bay Area was the only Western market to surpass $3 billion in office sales, but Los Angeles followed close behind with $2.89 billion. Denver had the third-largest sales volume on the West Coast at $2.88 billion, with Seattle and Phoenix also in the $2 billion and over range at $2.63 billion and $2.12 billion, respectively.

However, San Francisco claimed the highest year-to-date sales price not only on the West Coast, but nationwide as well at $941 per square foot, followed by Seattle’s $583— the third-highest rate nationwide. Phoenix clocked in at $277 per square foot, surpassing the national rate of $263.

Midwestern Markets: Chicago’s $2.5 Billion Sales Volume One of the Ten Largest in the U.S.

In the Midwest, both Chicago and the Twin Cities saw asking rents trend month-over-month, but year-over-year, both markets contracted. As such, Minneapolis - St. Paul closed September at $25.64 per square foot following a 4.9% year-over-year drop. Chicago rates ticked down at a slower 2.1% rate, going from the year-ago $28.09 per square foot to $27.51 per square foot in September 2022.

In terms of vacancies, the Twin Cities saw vacancies inch down, while Chicago’s office market saw vacancies increase by 3.1%.

Midwest Regional Highlights

From a sales perspective, the Midwest’s two top markets both posted year-to-date sale prices below the national average of $263 per square foot. Specifically, Chicago’s office assets traded at an average of $182 per square foot and the Twin Cities averaged $123 per square foot for office transactions. As a result, Chicago had the 22^nd and the Twin Cities the 25^th highest year-to-date sale price among the nation’s leading office markets.

But while Minneapolis – St. Paul closed $844 million in office sales in the first three quarters of the year, Chicago totaled $2.5 billion — the tenth largest office sales volume in the U.S.

When it came to new supply, both markets were below the national average of 2.1% of existing stock. Specifically, Chicago’s under-construction office projects accounted for 1.0% of its existing stock, while the Twin Cities’ office starts with shovels in the ground accounted for 0.5% of its current stock.

Southern Markets: Washington, D.C. Closes $4.1 Billion in Office Sales in First Three Quarters of the Year

Miami remained the darling of the Southern office sector with asking rents continuing to rise and reaching $48.32 per square foot. It was followed by Austin’s $42.03 per square foot rate, the result of a 4.0% year-over-year contraction, while Washington, D.C. inched up nearly 2.0% year-over-year to rest at $41.43 per square foot. Of the ten Southern office markets ranking among the country’s leading 25, half recorded decreases and half increases in average asking rents, while vacancies were on the rise in seven.

In Texas, Austin was not the only market where rents slipped below year-ago figures, with Houston rates inching 1.6% year-over-year to rest at $29.86 per square foot. Asking rents in the Dallas – Fort Worth area stood at $28.50 per square foot, 0.9% below year-ago figures, with vacancies ticking up 0.6% year-over-year. In Florida, Orlando rates rose to $23.70 per square foot with vacancies also on the upswing at a 1.7% year-over-year rate. Tampa rents trended down to $28.09 per square foot, with vacancies 1.3% higher than year-ago figures.

South Regional Highlights

In terms of sales, Washington, D.C. claimed the second-largest office sales volume in the U.S. at $4.1 billion, while Dallas was fifth with $3.74 billion in office sales and Atlanta followed with $2.69 billion. Tampa and Orlando totaled less than $1 billion in office deals in the first three quarters of 2022, closing $729 million and $538 million, respectively.

However, Miami claimed the highest year-to-date sales price in the South at $393 per square foot, followed by Austin at $384, Charlotte’s $303 per square foot and Washington, D.C. at $302, with all four markets comfortably above the national average of $263 per square foot.

New office developments continued at a quick pace in Austin, Charlotte and Nashville, which had the most robust office development pipelines in the country from the perspective of increases to existing stock. Specifically, Austin’s under construction projects accounted for 8.5% of its existing stock, Charlotte’s for 7.7% and Nashville’s for 5.6%. Even in terms of square footage, Austin and Dallas had some of the largest development pipelines, outpaced only by the Bay Area, Boston and Manhattan. 

Northeastern Markets: Boston Sales Volume Surpasses Combined Sales of New Jersey, Philadelphia and Brooklyn

Manhattan, of course, continued to post the steepest asking rent in the U.S., closing September at $70.37 per square foot and a 0.8% year-over-year contraction. As expected, Brooklyn was the second-priciest office market in the Northeast at $50.24 per square foot. Boston, New Jersey and Philadelphia had the next highest rents, resting at $40.33 per square foot, $32.88 per square foot and $30.58 per square foot, respectively.

Manhattan, as expected, had the largest sales volume in the country by a significant margin, closing $5.46 billion in office sales, with Washington, D.C.’s $4.1 billion the next largest. Boston’s sales volume total was just $2 million shy of $4 billion. As a result, Boston’s sales volume was larger than the combined sales volumes of New Jersey ($2.21 billion), Philadelphia ($1.03 billion) and Brooklyn ($607 million).

And while Philadelphia’s and New Jersey’s year-to-date sale prices of $200 per square foot and $234 per square foot were under the $263 per square foot national average, Manhattan, Boston and Brooklyn were among the five most expensive office markets in the U.S. Specifically, Manhattan’s $858 per square foot was second, while Boston’s $485 and Brooklyn’s $480 were fourth and fifth.

Northeast Regional Highlights

In terms of new supply, Manhattan and Boston had the largest square footage of office space under construction at 18.6 million square feet and 12.44 million square feet, respectively. That accounted for 4.1% of Manhattan’s existing stock and 5.2% of Boston’s. In fact, when taking into account office projects in the planning stages, Boston is set to increase its office footprint by 12.4%. Conversely, New Jersey’s 1.37 million square feet of office space currently under construction is set to expand its footprint by a mere 0.7%. When taking into consideration planned projects as well, New Jersey’s pipeline accounts for 1.8% of its existing stock, for the slowest rate of increase in office space among the top 25 office markets in the U.S.

Office-Using Employment: Financial Activities Sector Hiring Wanes

Office-using sectors of the labor market added 51,000 jobs in September, according to the Bureau of Labor Statistics (BLS).

The financial activities sector has slowed in recent months and turned negative in September, losing 8,000 jobs. Before the pandemic, employment growth between all three office-using sectors moved more or less in sync. Following the pandemic, however, financial activities has fallen behind Information and professional and business services (PBS). In every month since April 2021, the Information and PBS sectors have grown at an annualized rate of more than 5%.

In contrast, the financial activities sector’s peak growth rate during was just 2.4%, recorded in June 2022. In August, seven of the top 25 markets covered by CommercialEdge — Denver, Boston, the Bay Area, San Diego, Phoenix, Los Angeles and Washington, D.C. — lost financial activities jobs year-over-year. That slowdown is bad news for the office industry, as financial sector workers are some of the most likely to come into the office full-time.

Office-Using Employment Growth by Sector

Trends & Industry News: Flex Space Demand Drives Expansion

Driven by hybrid work arrangements, a flight-to-quality among occupiers and a desire to avoid long-term leases, demand for flexible office space is rapidly increasing.

An analysis of surveys from major brokerages indicates that demand for flexible office space will continue to grow in coming years. JLL’s Future of Work Survey of more than 1,000 corporate real estate decision-makers found that 43% of firms plan to increase investment in flex space through 2025.

CBRE’s Occupier Sentiment Survey showed while only 17% of U.S. occupiers report that flex space is a significant portion of their real estate portfolios today, 59% said that it will be significant within the next two years. It’s not only C-suite decision-makers driving demand, however, but workers as well. A joint WeWork and Cushman & Wakefield survey found that people in WeWork offices currently spend 40% of their work time in the flex space but want to increase that to 55% in the future.

Given the flexibility and amenities coworking locations provide, there is real opportunity to align with what corporations are needing in future space decisions. We’re tracking around 120 million square feet of flexible space and expect that number to rise significantly in the future.

Peter Kolaczynski, CommercialEdge Senior Manager

Commercial real estate brokerages are taking notice and increasing their investments in coworking. After investing more than $200 million in Industrious in 2021, CBRE put an additional $100 million into the flex space operator this year.

Cushman & Wakefield entered a strategic partnership with WeWork, investing $150 million and combining the coworking firm’s hospitality technology with the brokerage’s asset and facilities management services. JLL is operating coworking spaces under the brand Flex by JLL and will be developing a ground-up, 15,407-square-foot coworking space in Secaucus, N.J.

Meanwhile, established industry participants are also increasing their footprints. Over the summer, IWG, the parent company of both Regus and Spaces, announced it would be adding at least 500 U.S. locations with a focus on smaller cities and the suburbs. Between its two brands, IWG already has upward of 1,000 coworking locations in markets covered by CommercialEdge. WeWork, the second-largest operator, has more than 250 spaces.

The shift to hybrid work is also leading owners to consider operating their own coworking spaces in an effort to restore occupancy and cash flow. Boston Properties has rolled out FLEX by BXP in a handful of its buildings and Irvine Company offers Flex Workspace+. However, smaller landlords may be wary of the large capital expenses that come with building out high-quality flex space and may look to dedicated operators instead. Management agreements which allow owners and flex space operators to share revenue could become a common solution.

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.

The post Office Starts Slump in Gateway Markets but Advance in the Sunbelt appeared first on CommercialEdge.

• The average U.S. office listing rate stood at $38.70, ticking down 0.1% year-over-year
• Down 10 basis points year-over-year, the national vacancy rate stood at 14.8%
• 139.9 million square feet of new office space was under construction at the end of August
• The national office sales volume totaled $59.63 billion in the first eight months of the year

Trends & Industry News: Life Sciences Still in Demand

Thanks in part to breakthroughs of mRNA and CRISPR technologies, billions of dollars of funding — both private and public — have been flowing into the life science sectors in recent years. Investors are paying top dollar for lab space, and developers are rushing to bring more to market. While there has been some concern in recent months that rising interest rates and general economic weakness could cause a slowdown in the sector, it has not yet manifested in the sales and supply data.

Life science properties continue to command high sale prices in 2022, with the average facility trading at $645 per square foot, 150% higher than the overall average of $258 per square foot for general office buildings. Buildings that are candidates for lab space conversions can command higher prices, too. DivcoWest bought the 138,400-square-foot 5000 Shoreline Court in South San Francisco for $164.5 million ($1,188 per square foot) and immediately began converting the building into lab space.

Developers are rushing to build in life science markets as supply of lab space lags demand. Including owner-occupied properties, 21.6 million square feet of lab space is underway nationally. Boston currently has 27 projects totaling 8.4 million square feet under construction, followed by San Diego (eight properties, 2.9 million square feet) and San Francisco (10 properties, 2.6 million square feet).  

New supply has also been growing in tertiary life science markets. PNB and Montgomery Street Partners announced they will be developing the first speculative life science property in Boulder County, Colorado, with the 365,000-square-foot Coal Creek Innovation Park. S3 Biotech is developing a 2.5-million-square-foot campus in Phoenix that includes life science, medical office and sports science facilities.

A recent CommercialCafe analysis of data from The Bureau of Labor Statistics (BLS) found that in 2021 life sciences employment was highest in Boston (23,900 jobs), New York (18,100) and San Francisco (14,200). The BLS also estimates employment in all science, technology, engineering and math (STEM) occupations, giving a broader look at the number of science and tech workers in a particular metro.

The metros with the most STEM workers in 2021 were New York (515,540), Washington, D.C (364,140), Los Angeles (342,870) and San Francisco (289,960). Metros with the highest STEM jobs as a percentage of all employment were California-Lexington Park, Md. (24.4%), San Jose (22.1%) and Boulder (17.8%).

Listing Rates and Vacancy: Mixed-Use Project in San Diego Drives Up Rates

Across the top 50 U.S. office markets, the average full-service equivalent listing rate stood at $38.70 in August, down 0.1% year-over-year.

Down 30 basis points month-over-month, the national vacancy rate registered a 10-basis-point increase year-over-year, stabilizing at 14.8%.

At the market level, Charlotte has been dethroned as the leader of listing price growth after five consecutive months at the top. Although Charlotte posted a 16.2% year-over-year increase, higher than the previous month’s 15.6%, listing prices in Boston accelerated from +12% year-over-year in July to +17.7% in August — the sharpest growth rate nationally. As a result, Boston reached an average full-service equivalent listing rate of $40.58 per square foot.

Listings by Metro Area: September 2022

A market’s average listing rates can often reflect the product listed rather than underlying shifts in market fundamentals. Case in point is San Diego, where listing rates have soared 11.8% in the last year, in large part driven by a massive new mixed-use development at the site of a former mall in the Gaslamp Quarter. The Campus at Horton Plaza — claiming to be the largest adaptive reuse project in the country — will cover 10 acres over seven city blocks and include retail, as well as office space suited for both tech and life science firms.

The 100 Building at the campus — a proposed LEED-certified platinum building — recently listed 700,000 square feet of full-service office space at an average of $60 per square foot, which has driven up average rates in the market.

Supply: Mixed-Use Increasingly Prevalent

Nationally, 139.9 million square feet of new office supply is currently under construction.

Due to a change in the way CommercialEdge reports new office development, numbers from this and future reports will not be comparable to previous reports. Previous reports included total building size, but with mixed-used continuing to grow in prominence, reports will now only account for the amount of rentable office space within a property. This change reduces the total amount of office space under construction by 11.9 million square feet (7.5%).

Office Space Under Construction (Million Sq. Ft)

In a handful of mixed-use properties, the amount of office space is a small portion of the total building size. Miami’s high-end, 2.3 million-square-foot 1 Southside Park will only have 165,000 square feet of rentable office space to go along with ground-floor retail, 1,175 apartments and a 200-room hotel. In Tampa, 400 Central is including just 45,000 square feet of office in the 1.3 million-square-foot project.

Office Space Under Construction & Planned

Other mixed-use projects under development devote a more significant portion to office space. In Austin, 98 Red River St. will set aside 700,000 of 2.3 million total square feet to office, and roughly half of Sixth and Guadalupe’s 1.1 million square feet will be office.

National New Supply Forecast

Transactions: Manhattan Sales Diverse in 2022

CommercialEdge has logged $59.6 billion of office transactions through the end of August nationally, averaging $258 per square foot.

Year-to-Date Sales (Millions)

A wide variety of office buildings are driving Manhattan’s sales volume. The trophy tower at 450 Park Ave. traded in the second quarter for $445 million, an average of $1,350 per square foot. Some boutique offices have traded at high values this year, as well. In February, Macquarie Asset Management purchased 375 Broadway, a 56,000-square-foot mixed-use building in SoHo that includes Square’s New York offices, for $130 million, an average of $2,334 per foot. 

Year-to-Date Sale Price Per Square Foot

Asset Class Price Per Square Foot

Quarterly Transactions (Billions)

Quarterly Transactions Price Per Square Foot

Western Markets: California Leads Listing Rate Increases

San Diego topped Western markets in terms of listing rate increases, with San Francisco listing rates increasing the second-fastest among Western states, up 4% year-over-year, with Los Angeles right on its heels at +3.9% year-over-year. However, San Francisco also saw the highest rise in vacancy rates, coming in 400 basis points higher than year-ago figures, for an August average of 18.1%.

West Regional Highlights

Considering San Diego’s massive adaptive reuse project in the Gaslamp Quarter and the city’s active life sciences sector, it’s no surprise that the metro currently has the equivalent of 4.6% of existing stock under construction, the largest share among Western markets. In absolute numbers, however, the Bay Area has the largest pipeline, with 7.66 million square feet under construction at the end of August.

The Bay Area also posted the largest year-to-date sales volume in the West, totaling $3.16 billion — the fifth highest nationwide. Denver, Los Angeles and Seattle followed close behind at $2.75, $2.73 and $2.5 billion in office transactions, respectively.

San Francisco claimed the highest sales price at a year-to-date average of $881 per square foot, followed by Seattle at $597 per square foot and the Bay Area at $481 per square foot.

Midwestern Markets: Chicago Reaches $2.49 Billion in Office Sales

In the Midwest, both Chicago and the Twin Cities experienced negative growth in listing rates compared to year-ago figures. Specifically, the average listing rate in Chicago shrunk 2.9% year-over-year, stabilizing at $27.33 per square foot, while the Twin Cities closed August at $25.43 per square foot, 5.4% below year-ago rates.

As for vacancies, Chicago and the Twin Cities dealt with opposing trends. Chicago’s office vacancy rate increased 130 basis points year-over-year to reach 18.2%, whereas Twin Cities vacancies averaged 12.2% at the end of August — 320 basis points lower than the same period last year.

Although new office developments are under construction in Chicago as well as in St. Paul and Minneapolis, their pipelines are not comparable to those of more active Sunbelt or life science cities such as San Diego (4.21 million square feet), Charlotte (5.75 million square feet) or Austin (8.83 million square feet). 

Midwest Regional Highlights

As a gateway market, Chicago’s new construction footprint is significantly larger than that of Minneapolis and St. Paul — just over half a million square feet — totaling 2.69 million square feet, or 0.9% of its current inventory. Projects still in the planning stages, however, would account for 6% of Chicago’s total office footprint.

Chicago’s sales volume amounted to $2.49 billion for the first eight months of the year, the ninth-highest nationwide, while the Twin Cities totaled $787 million in office deals so far in 2022. From a pricing perspective, the Twin Cities had the lowest year-to-date average sale price among the top 25 office markets in the U.S., closing August at $131 per square foot. Chicago’s sale price of $189 per square foot was the fourth lowest.

Southern Markets: $3.48 Billion Dallas Office Sales Volume Largest in the U.S.

After being the #1 market for listing price growth rates across the top 50 office markets for five consecutive months, Charlotte was dethroned by Boston in August. However, it remains the leader among Southern markets, posting a 16.2% year-over-year increase. It was followed by Orlando and Miami, where listing rates grew by 7.2% and 5.6% year-over-year, respectively. That lifted Orlando’s average listing rate to $23.53 per square foot and Miami’s average to $45.54, with Miami’s rates the highest in the South.

While Charlotte had the second-highest listing rate increase in August, Miami posted one of the lowest vacancy rates nationwide at 8.6%. Not only that, but Miami also underwent the sharpest drop in vacancies across the top 50 office markets in the country, dropping by 490 basis points compared to the same period last year.

South Regional Highlights

Austin continued as a top performer in new office space development, with under-construction projects totaling 8.83 million square feet, amounting to 10.7% of its existing stock — the largest construction pipeline in the South both by square footage and percentage of existing inventory. Additionally, Austin also had the equivalent of 24.7% of its stock in the planning stages by the end of August.

Dallas had the second-largest construction pipeline in the South by square footage with 7.22 million square feet, representing 2.7% of its stock. Dallas stood out in terms of sales as well, recording $3.48 billion in office transactions by the end of August for the largest office sales volume in the country, with its $194 per square foot year-to-date sales price making that volume even more remarkable. At $3.24 billion, Washington, D.C., was the only other market in the South to surpass $3 billion in sales, while Houston and Atlanta both closed more than $2 billion in office deals year-to-date.

At the same time, Miami posted the highest sale price per square foot among Southern markets, with its year-to-date average coming in at $381 per square foot. Austin and Charlotte had rates in the $300s as well, with Austin’s $381 per square foot and Charlotte’s $353 per square foot pricing the second and third highest in the Southern office landscape.

Northeastern Markets: Boston Listing Growth Rate Highest in the U.S.

Boston took over as the top office market for listing rate growth nationwide, closing August with a 17.7% year-over-year increase, bringing its average to $40.58 per square foot. Listing rates trended upward in Philadelphia and New Jersey, too, coming in at 4.8% and 3% over year-ago figures. Philadelphia also had one of the lowest vacancies among Northeastern markets, coming in at 12.9%.

Northeast Regional Highlights

Manhattan commanded the highest sales price, with office spaces trading for an average of $901 per square foot, followed by Brooklyn’s $533 per square foot rate at a significant distance. Moreover, Brooklyn had the smallest sales volume among leading Eastern markets with just $404 million in office sales year-to-date, outpaced even by Philadelphia with its $988 million total. New Jersey went further, surpassing $2 billion in sales by the end of August, while Manhattan and Boston closed more than $3 billion in office deals in the first eight months of the year.

Office-Using Employment: Growth in Information Sector Slows in San Francisco

Office-using sectors of the economy added 92,000 jobs in the month of August and have grown 4.5% year-over-year.

In San Francisco, the rapid growth in information jobs that fueled the office market has slowed since COVID-19 emerged. While there has been somewhat of an exodus from workers and firms from the high-priced market since the pandemic began, year-over-year growth in the Information sector never went negative, though it has fallen from breakneck to merely solid.

Between 2014 and 2019, the information sector in San Francisco added more than 50,000 jobs, growing at an average annual rate of 15%. Since the start of 2020, the information sector has added 15,000 jobs, an average annual rate of 5.8%. Tech firms in the city are hiring at a slower pace, and the largest driver of office employment in the market is now the professional and business services (PBS) sector. PBS jobs have grown at a higher rate in San Francisco than information for all of 2022, which had not occurred since 2013.

Office-Using Employment Growth by Sector

Download the PDF report to view more charts, including quarterly transactions and sales prices at the asset class level.

You can also see our previous office reports.

Methodology

This report covers office buildings of 25,000 square feet and above. CommercialEdge subscribers have access to more than 14 million property records and 325,000 listings covering 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. 
• Stages 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. 
• 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.

The post Life Sciences Continue Driving Demand for Office appeared first on CommercialEdge.

• The average U.S. office listing rate stood at $37.75 in July, slipping 2.3% year-over-year
• Up 10 basis points year-over-year, the national vacancy rate stood at 15.1%
• 149.5 million square feet of new office space was under construction at the end of July
• Year-to-date, the national office sales volume reached $51.9 billion

More than two and a half years into the COVID-19 pandemic, the office sector continues to struggle with high vacancy rates and contracting listing rates. Coworking spaces, however, are quickly rebounding, despite being considered by many to be the first commercial real estate sector to be doomed by the pandemic.

But with office-using business sectors increasingly embracing long-term work-from-home and hybrid models and employers reevaluating their traditional office footprints, coworking and flex spaces are increasingly becoming the answer to companies’ space needs.

WeWork’s occupancy rates have returned to pre-pandemic levels and memberships are at a historic high for the company. Other flex and coworking operators like IWG are also reporting revenue increases across the board.

With coworking spaces in high demand and lower operating costs than traditional office environments, CommercialCafe and CoworkingCafe expect this commercial asset type to grow in prominence in the coming years. This holds especially true when considering that there are currently only about 117.5 million square feet of coworking and flex office space nationwide, with most of the national stock concentrated in just a few markets like Manhattan, Los Angeles, Chicago, Washington, D.C. and Dallas.

For more details on the national construction pipeline and additional office fundamentals, download the full August 2022 report at the bottom of the page.

Charlotte Listing Rate Growth Tops National Rankings for 5^th Consecutive Month

Across the top 50 U.S. office markets, the average full-service equivalent listing rate stood at $37.75 in July, up 17 cents month-over-month, but down 2.3% year-over-year. At the same time, the national vacancy rate ticked up 10 basis points both month-over-month as well as year-over-year, stabilizing at 15.1%.

At the market level, Charlotte remained the top performer in price growth for the fifth consecutive month with a 16.8% increase year-over-year that brought its average full-service equivalent listing rate to $33.62 per square foot. That also marked a 17-cent increase over June figures.

Charlotte’s performance is even more notable when considering that its vacancy rate dropped 130 basis points year-over-year, despite a 4.9 million-square-foot infusion of new office space in 2021, fueled by the city’s office-using financial sector. While only 338,000 square feet of new office space came online so far this year, Charlotte currently has 4.3 million square feet of new stock under construction — the equivalent of 5.6% of its existing inventory.

Charlotte was also just one of three markets where listing rates grew by double digits, joined by the life science hubs of San Diego and Boston, which registered listing rate increases of 13.9% and 15.2% year-over-year, respectively.

The Bay Area, Manhattan and Boston Surpass $3 Billion in Office Sales

Year-to-date, office sales have reached $51.9 billion nationwide, of which $8.2 billion were closed in July alone, on par with June’s $8.4 billion sales volume. However, the year-to-date national sales prices slid $7 per square foot month-over-month, posting a $265 per square foot sale price in July.

Investors continue to increasingly reorient towards life science markets like Boston and the Bay Area, where office occupancy rates remain higher due to the in-person nature of many life science jobs.

As a prime example for the attraction posed by life science markets, the Bay Area’s priciest sale this year was the $446 million acquisition of Stanford Research Park by Alexandria Real Estate Equities. That deal commanded a $1,527 per square foot sale price, contributing to the Bay Area’s year-to-date sales volume of $3.07 billion.

The Bay Area was one of three markets where year-to-date sales volumes have now surpassed the $3 billion threshold, joined by Manhattan and Boston, while five additional markets led by Dallas-Fort Worth closed in excess of $2 billion in office sales each.

Boston Office Construction Pipeline Hits 12.3 Million Square Feet

Nationally, there were 149.5 million square feet of office space under construction as of July, amounting to 2.2% of the existing national stock. Projects with shovels in the ground reflected the shifting trends of post-COVID office developments: Only 31% of office projects are being developed in suburban markets. By comparison, 42% of the 28.7 million square feet delivered in the first seven months of 2022 came online in suburban locations.

Planned projects equaled 6.5% of existing stock, ticking up from June’s 6.2%. Of course, uncertainty surrounds how much of this planned stock will actually break ground considering the headwinds faced by the office sector. At the same time, companies in markets with considerable coworking, hybrid and flex space square footage are increasingly reorienting towards this asset type to satisfy shifting office needs.

Life science markets continued to outperform other office markets except for select Sunbelt office hubs like Austin, Nashville and Charlotte, where office projects under development accounted for 9.5%, 6% and 5.6% of local inventory. Traditional life science cities like Boston and San Diego were among the best performing markets in terms of new development too.

While the latter has 4.8 million square feet of office space under construction, equal to 5% of its existing stock, Boston is developing the equivalent of 4.9% of its existing stock for a total office development footprint of 12.3 million square feet. Since the pandemic began, more than 40% of all new Boston projects were life science developments and those that have broken ground since the start of 2021 have a life science share of 55%, not counting projects that will have only a partial life science footprint.

Download the full August 2022 report on performance across U.S. office markets, as well as insights on industry and fundamentals of economic recovery.

You can also see our previous office reports.

Methodology

This report covers office buildings of 25,000 square feet and above. CommercialEdge subscribers have access to more than 14 million property records and 325,000 listings covering 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. 
• Stages 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. 
• 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.

The post Coworking Rebounds as Solution to New Office Use Models appeared first on CommercialEdge.