The emergence of the COVID-19 Delta variant has played an important part in delaying some planned returns to the office. However, many businesses have been well equipped to adapt to the continually shifting economic environment. While some companies are pushing reopening dates later in the fall or to next year, other firms (such as United Airlines or Alphabet) are expanding safety protocols for returning employees, which may allow in-office work to resume as planned.
Office leasing rates have remained unchanged by these developments thus far, as landlords have been offering concessions and amenities to maintain price stability. According to a recent report released by CommercialEdge, the national average full-service equivalent listing rate rested at $38.62 per square foot in July, marking a 1.2% year-over-year increase and a two-cent increase over June. Across the top 50 U.S. markets, average office rents varied from $22.13 per square foot (Orlando, Florida) to $83.52 per square foot (Manhattan).
The most significant year-over-year increase was recorded in Los Angeles, where office asking rates surged by 8.1%, reaching an average of $41.60 per square foot. Leasing rates grew by 6.2% in both the Bay Area ($55.79) and Tampa ($29.70), which share the second spot for rent growth. Meanwhile, rates for office space in Miami ($43.43) placed third on the list, rising by 5.8% year-over-year.
In terms of availability, the July average vacancy rate rested at 15.5%, 190 basis points higher compared to the same time last year. However, the steep increases in availability prompted by the pandemic have been winding down — the national vacancy rate was 10 basis points lower compared to June.
Notably, the growth of the biomed and life sciences sector has been an essential factor in vacancies decelerating in some markets. Demand for life sciences and biotech office space has been rising steadily in the past decade and has only heightened during the COVID-19 pandemic. A surge in public and private capital investment has boosted the industry through 2020 and 2021, so office markets with established pharmaceutical and biotech sectors have been attracting both new and expanding tenants. Notably, two of the most prominent life sciences clusters in the country recorded vacancies in the low double-digits: Boston had an 11.7% vacancy rate in July, while San Diego office space logged 14.2%.
Meanwhile, office transactions recorded in the first seven months of this year totaled nearly $37 billion, highlighting investor interest in high-potential deals. The volume is still low compared to pre-pandemic levels, but 2021 sales could surpass the almost $62 billion recorded last year if the trend continues. For example, this July, 725 Ponce in Atlanta exchanged hands for $300 million – while fully leased to tenants such as BlackRock and McKinsey. The property sold for an average of $807 per square foot, the highest average price per square foot CommericalEdge has logged in the Atlanta market. Furthermore, LinkedIn paid $323 million for a new headquarters in Sunnyvale, Calif., despite the company’s decision to allow remote work permanently.
In terms of supply, over 34 million square feet of new office space was delivered across the top 50 markets by the end of July. Completions will likely remain high through the next two years, as a significant portion of projects had shovels in the ground before the pandemic. However, the under-construction pipeline has been adjusting to changes in demand – a total of 157 million square feet of stock was under construction as of July, marking a 4.5% drop since the beginning of the year.
Download and read the full report on August 2021 office lease rates, sales and construction here.