Office Is On a Slow Slog to Recovery

The office market is showing renewed signs of life as firms evaluate and implement return-to-work strategies, with average leasing rates inching up 1.4% year-over-year to an average of $38.67 per square foot.  

Manhattan remained the priciest market nationwide, with an average listing rate of $85.82 per square foot, followed by San Francisco, with average rates of $69.66 per square foot. The overall Bay Area market came in third, posting rates of $57.11 per square foot, the highest average full-service equivalent listing rate across the markets analyzed by CommercialEdge in a new report.

The Bay Area also came in first for year-over-year growth, showing an 8.6% increase over March 2020 numbers, followed by Washington D.C. and New Jersey.

But despite those tailwinds, office vacancy continues its upward climb, owing in part to new stock. An additional 163 million square feet of new office space is currently under construction across the country, with more than two-thirds concentrated in central and urban markets. And nationally, overall vacancy rates went up by 280 basis points year over year, hitting an overall average of 15.6% across the major markets surveyed by Commercial Edge.

“It’s worth noting that the large-scale shift to remote work is only a contributing factor,” the report said. “A significant portion of new office space was already under construction prior to the onset of the pandemic in early 2020. Therefore, it comes as no surprise that competitive office markets—such as Seattle, Austin, San Francisco and the Bay Area—have seen their vacancy rates increase from single- to double-digits during the last 12 months as projects encompassing millions of new square feet of office space were being delivered.”

The tightest markets for occupancy were Manhattan (10.7% vacancy rate) and Boston (12%).

Yet despite the glut of supply, high-end office assets continue to command investor confidence, with the market registering $10.5 billion total quarterly sales.  Top sales included The Exchange on 16th in San Francisco ($1 billion); 410 10th Ave. in Manhattan ($733 million); and The Crescent in Dallas ($700 million), which accounted for nearly 25% of the total $10.5 billion in sales over Q1.

“The deals closed so far this year indicate that high-quality office properties in well-established markets continue to attract significant attention,” the report notes.

On the construction front, 14 million square feet of new space was delivered in Q1, with 64 million square feet expected by the end of 2021. Most of this activity was concentrated in higher-density areas—a trend that’s contrary, the report notes, “to earlier pandemic speculations regarding a predicted outflow of development to suburban areas.”