Office Sales Continue Their Slide

To no one’s surprise office investment sales continue to plummet, reaching $14.8 billion in the first half of 2023 compared to $43.7 billion in the same period last year, according to Commercial Edge. 

The national vacancy rate reached 17.1% in July, rising 180 basis points over figures from a year ago. Listing rates fell in several markets, including some of the most expensive such as New York City where they were down 2.8% year-over-year and in the Bay Area where they were down a greater 5.57% for the same period.

The different asset classes and different geographic markets saw different trajectories. Urban A and Class B buildings remain the hardest hit for new leases with asking rates falling and vacancies rising. The national average full-service equivalent listing last month was $37.82, an increase of 0.6% from a year ago but average rates for A and A+ spaces went down by 1.4% from last year to hit $45.41 per square foot. Class B, however, has inched up by 0.3% to $30.37 per square foot and Class C also went a bit higher at 0.3% to $23.04 YoY.

In the suburbs, properties increased the most, up 3.3% to $30.76 per square foot, versus the prior year. But Central Business District office spaces went down 1.7% to $49.02 per square foot. Urban offices have also gone down by 1.4% to $44.80 per square foot YoY.

Medical office buildings represent one of the bright spots, deemed a “safe haven” by the report because they’re consistent year to year, due to the country’s aging population which needs healthcare services on a regular basis, and advances in medical technology and treatments from shifted procedures away from hospitals to outpatient centers. Throughout 2023’s first half, the average hit $296 per square foot, nearly $100 more per square foot than the national office building average.

Half of the top 25 markets recorded vacancies above the national average, with some much more than others. Denver increased 310 bps in the last 12 months and is at 20.1% versus the national average of 17.1%. This correlates with the fact that Denver has one of the highest rates of remote work, according to the Census Bureau’s American and Community Survey. To lower it, Denver’s city government is working with other cities to pay a consulting firm to study the possibility of converting vacant buildings in their CBDs to housing. 

In Austin, there’s a big pipeline coming with construction of more than 1.5 million square feet started this year, the most of any market in the country. A lot of that is due to the 48-story The Republic tower with 800,000-square feet-plus. The city has a high office utilization figure, but the report says it could risk having too much supply as the vacancy rate rises.

In New Jersey, lab space has been the catalyst for making the state an active market, with $928 million in closed office deals.

Onyx Equities and Machine Investment Group purchased a 2-million-square-foot former Merck building for $187.5 million. Also, activity stems from the cluster of pharmaceutical companies in the state.

Los Angeles had the largest sales volume of $1.11 billion in office deals for the first six months of this year, outpaced only by New York City at $1.27 billion and Boston at $1.28 billion.

 As a whole, the Midwest’s major office markets had lower vacancy rates than West Coast hubs. The Twin Cities and Chicago saw the third- and fourth-lowest average listing rates amid U.S. office markets at $27.25 per square foot and $27.40 per square foot, respectively; overall, they were described as sluggish.