As two tumultuous years closed for the office sector and return-to-office plans were upended by new variants and case surges, millions of workers remained in remote or mostly remote setups. And, while the average office vacancy rate climbed across top U.S. markets, one segment continues to show resiliency: medical office buildings (MOBs).
Even though elective and non-essential procedures declined in the early days of COVID-19’s emergence, the demand for these procedures rebounded by the end of 2020 – and created increased interest for MOBs among developers and investors. In fact, more than 16 million square feet of space currently under construction includes medical office space. Paired with an aging population, interest in this office subsector – especially in suburban areas – is likely to further increase.
According to the latest leasing data from CommmercialEdge, office space vacancies hit 15.7% across the top 50 U.S. markets, up 110 basis points (bps) year-over-year (Y-o-Y) and 20 basis points over late 2021 figures. That vacancy rate is expected to increase even more due to developments that were started before the pandemic and the omicron variant-fueled delays in return-to-office policies.
The importance of interest in MOBs is exemplified by the Boston office market, which posted the lowest office vacancy rate in the country at 10.7%, down 40 bps year-over-year. It was followed by Miami’s 13.4% vacancy, which has proven to be one of the more resilient office markets nationally, with its vacancy declining 190 bps Y-o-Y while simultaneously posting the third-sharpest listing rate growth.
Specifically, Miami posted a $43.43 per square foot listing rate, up 5.8% year-over-year, outpaced by the San Francisco Bay Area ($55.79) and Tampa, Florida, ($29.70) office markets, both of which recorded a 6.2% year-over-year increase, as well as Los Angeles’ ($41.62) 8.1% Y-o-Y hike. On the other end of the spectrum stood Portland, Oregon, ($29.97) with a 1% listing rate increase over January 2021; Atlanta ($27.64) with a 0.8% uptick; and the 0.5% increase in Charlotte, North Carolina, which brought it to $29 per square foot. With most markets in similar territory, the average full-service equivalent listing rate across the top 50 U.S. office markets came in at $38.62 square foot, up 1.2% over year-ago rates.
Meanwhile, with plenty of office projects that were in the works before COVID-19 hit, pre-pandemic supply is still coming online and is expected to continue to contribute to rising vacancies. January closed with 150.5 million square feet of office space with shovels in the ground, half of which were in urban markets outside of central business districts (CBDs) and downtown cores. An additional 31% are under construction in suburban markets and 19% in CBDs and city centers.
Notably, the development pipeline of 9 million square feet in Austin, Texas, represented 10.3% of its stock, making this the top development pipeline among the country’s most important markets. Miami made itself visible here, as well, with its 5.6 million square feet of office space accounting for 8% of total market stock. In Nashville, Tennessee, the 4.6-million-square-foot development pipeline also accounted for 8% of the local stock, with Brooklyn, New York, seeing 5.2% of stock under construction for a total of 2.1 million square feet of additional office space.
At the same time, Boston developments accounted for 4.9% of local office stock, with its 12.2 million square feet of under-construction office assets representing the second-largest pipeline in the U.S. However, the majority of that (8.2 million square feet) represented pre-pandemic projects that were started between January 2019 and March 2020, whereas only 4.9 million square feet were part of projects that have broken ground since then.
With new starts waning, 2022 brought a strong start for office sales, as nearly $5.9 billion in transactions were closed in January. This brought the national average office sale price to $288 per square foot at the end of January. The tech-heavy San Francisco Bay Area boasted the strongest transactional start among the top 50 U.S. markets: $715 million in office sales closed there in January alone, bringing the average San Francisco Bay Area office sale price to $611 per square foot, the highest in the U.S. On the opposite coast, Boston ($249) boasted the second-largest sales volume with $435 million, followed by Washington, D.C.’s ($531) office sales volume of $367 million.
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Irina Lupa is a real estate writer for CommercialEdge, PropertyShark and RENTCafé, where she covers market trends and industry news. Her work has been cited in Forbes, GlobeSt, CNBC and Construction Executive, among others.