Two and a half years after the pandemic began, the short-term future for the office sector remains uncertain, with record vacancy rates adding to the industry’s woes, according to a recent office report from CommericalEdge. And as hybrid and work-from-home business models continue to take hold — and rising inflation rates further deter workers from returning to traditional office settings — the sector’s long-term prospects are also murky.
Top Markets for Highest Listing Rate Growth
The average full-service equivalent listing rate in the top 50 U.S. office markets was $37.58 per square foot in June — up two cents from the previous month, but down 2.6% from the previous year.
With a 15.6% gain year-over-year (Y-o-Y), Charlotte, North Carolina, continued to lead the market in price growth, increasing its average full-service equivalent listing fee to $33.45 per square foot. Prices in this market grew at progressively faster rates for the fourth straight month.
Similarly, Miami office space ($47.23/square foot) had a gain of 8.4% over the previous year and continued to be one of the fastest-appreciating office markets. But Boston still outperformed it with a 12% increase, thanks to the city’s thriving life sciences industry.
Boston Only Market with Office Vacancy Rate Less Than 10%
Although the national vacancy rate decreased 20 basis points (bps) month-over-month, it was up 20 bps Y-o-Y, leveling off at 15.2%. Notably, office markets with declining vacancy rates in June were primarily found in the Sunbelt, as well as in regions with sizable life sciences sectors.
In this area, Boston ($39.31/square foot) was the best-performing office market in terms of occupancy, as well as the only one of the top 50 office markets in the nation with a vacancy rate of less than 10%. Specifically, Boston’s vacancy rate dropped by 180 bps from the prior year to land at 9.6% in June. The Twin Cities (Minneapolis-St. Paul), down 190 bps Y-o-Y; Miami, down 200 bps Y-o-Y; and Phoenix were the only cities with significantly larger drops in vacancies.
National Office Sales Volume Increases to $43.7 Billion in 1st Half of 2022
Office sales in June totaled $8.4 billion to bring the country’s total sales for the year to $43.7 billion. Gateway markets like New York, Los Angeles ($42.01/square foot) and Chicago ($27.30/square foot) accounted for 32% of the national total. For comparison, gateway markets were responsible for 41.5% of the national office sales volume just five years ago.
Meanwhile, investors are increasingly shifting their focus toward tech cities like Seattle ($37.41/square foot), Denver ($30.14/square foot) and non-gateway life sciences markets like the San Francisco Bay Area — all of which have already seen more than $2 billion in office sales in the first half of the year. In fact, seven markets finalized office deals totaling more than $2 billion and another seven markets comfortably surpassed the $1 billion mark.
Construction Has Begun on 26.5 Million Square Feet of Office Space This Year
As of June, 151.7 million square feet of office space had been built nationwide since January, which was 500,000 square feet more than in May. Of this, 26.5 million square feet represented office construction projects that began in 2022, the majority of which were centered in just a few Sunbelt regions and life sciences clusters.
The San Francisco Bay Area ($56/square foot) led the pack among the latter, breaking ground on 2.3 million square feet of office space so far this year. Boston followed with 1.6 million square feet. Not far behind, just under 1 million square feet of new office starts were driven by San Diego’s ($41.60/square foot) life sciences industry since January.
But, when it comes to new office buildings, Dallas ($29.24/square foot) and Austin, Texas, ($42.39/square foot) greatly surpassed all of the others: Since the beginning of the year, 3.8 million square feet of new offices were constructed in Dallas, while Austin saw the finalization of 2.7 million square feet.
Likewise, with 2 million square feet started this year alone, Charlotte continued to dramatically increase the size of its office space. To the west, Phoenix ($26.96/square foot) was next with 1.1 million square feet of new office starts thus far this year.
Overall, 2.2% of the nation’s office stock was represented by projects that had shovels in the ground as of June, with an additional 6.2% still in the planning phases. Granted, the amount of anticipated inventory that will actually be built — given the rise in mortgage rates, the plateauing of job openings, and the maturation of hybrid and work-from-home models — is still up for debate.
Download the full July 2022 CommercialEdge report on performance across U.S. office markets, as well as insights on industry and fundamentals of economic recovery.
Eliza Theiss is a senior writer reporting about real estate trends in the US. Her work has been cited by CBS News, Curbed, The Los Angeles Times, and Forbes among others. With an academic background in journalism, Eliza has been covering real estate since 2012. She writes for both PropertyShark and CommercialEdge.