Market Activity Focus on High-Value Assets Sustains Growth of U.S. Office Lease Rate

Last week, commercial real estate property data and listings platform CommercialEdge published its most recent national office report, which paints a more current picture of office sector activity across the top 50 U.S. markets. Data analyzed for the June 2021 report found that:

  • The average office lease rate was up 0.4% year over year, as asking office rents averaged $38.36 per square foot in May.
  • Vacancy rates reached an average of 15.6%, following a 240 basis points increase compared to May 2020.
  • Office sales closed during the first five months of the year totaled nearly $23 billion, contouring the possibility that 2021 investment activity is likely to at least match last year’s total volume of $61 billion.

The report noted how increasing amounts of high-value office stock played a significant role in both lease and vacancy rate growth, as well as in driving investment. Specifically, millions of square feet of high-quality office space have entered the market as new developments were completed, fulfilling schedules established pre-pandemic. Moreover, several blocks have reentered the market, as existing high-quality office space becomes available due to leases expiring or large footprint tenants offering their space on the sublease market — as was the case in Manhattan at 4 New York Plaza, where JP Morgan listed 700,000 square feet, in addition to the company’s more than 100,000 square feet of Chelsea office space for lease at 5 Manhattan West.

Sales data showed that investor interest in office properties remained more focused on specific high-quality assets, rather than pre-pandemic market potential-driven appeal. In spite of generally cautious attitudes on the part of both buyers and sellers, capital continued to move toward specific classes of properties in urban and central business district submarkets. Consequently, the average sale price per square foot for U.S. urban office space reached $429, a 4.5% increase compared to the previous year. A handful of such high-profile sales accounted for nearly $4 billion of deals closed since the start of the year: The Crescent in Dallas, which sold for $700 million; 410 10th Ave. in Manhattan ($853 million); The Exchange on 16th in San Francisco ($1.1 billion); and 401 Park in Boston, which commanded $1.2 billion.

Such properties continue to change hands across the top 50 U.S. markets, a sign that current trends are likely to continue upward. Most recently, Los Angeles-based Kilroy Realty splashed onto the Austin office market with the $580 million acquisition of Indeed Tower. With roughly 730,000 square feet spread over 36 stories, and a high-profile tech tenant ( occupying 42% of the space through 2034, the Austin office asset changed hands at nearly $800 per square foot.

Growing tech hubs that are home to major-name tenants are not the only ones seeing increased attention from investors looking to drive value through lease-up campaigns. Medical office space, a hot commodity even before 2020, has attracted notably more interest since the events of last year. Lab space, as well as office properties compatible with conversions to accommodate life science sector tenants have been among the top-selling properties this year. For instance, LaSalle Investment Management acquired Archway Medical Plaza in Los Angeles this March, for $1,488 per square foot. The Exchange on 16th is another excellent example. Despite increasing vacancy on the San Francisco market at the time, the property sold for roughly $1,440 per square foot — the highest price per square foot ever paid for a major commercial property in the city, according to local brokers consulted by the seller, Kilroy Realty.

Download and read the full report on June 2021 office lease rate, sales and construction here.

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