Office Vacancies Exceed 22 Percent in Seattle, Austin, but Suburbs Hold Hope: Report
Analytics firm Yardi Matrix paints a grim picture for central business districts
The national office market remains imperiled as 2023 draws to a close. However, a glimmer of hope flickers in the suburbs for the beleaguered asset class.
National office vacancy stood at nearly 18 percent — with some major metropolitan areas experiencing vacancies higher than one-fifth their entire inventory — while office sales across the country were a fraction of their 2022 numbers through the first three quarters of the year, according to a new report from Yardi Matrix, a commercial real estate data analytics firm.
“Hybrid and remote work has not only changed how people utilize the office, but where they live, as well,” said the Yardi Matrix report. “Many workers left city centers for the suburbs during the pandemic, and some employers are looking to follow.”
Some of the most populous city centers in the United States are experiencing skyrocketing office vacancies.
Houston’s total office vacancy reached 25 percent in the third quarter, rising nearly 3 percent over the last 12 months; Seattle’s office vacancy is now 22 percent, increasing by 500 basis points over the last year.
America’s three largest cities — Manhattan, Chicago, and Los Angeles — all carry office vacancies between 16.5 percent and 18 percent.
All in all, the national office vacancy has increased 120 basis points in 2023.
Few downtown city centers have experienced more office distress than Austin.
The capital of the Lone Star State watched its vacancy rate increase by 360 basis points since October 2022 and now sits at a whopping 21.2 percent.
As Austin markets itself to young professionals and tech firms, the city has in turn become a magnet for new office development. But the development pipeline appears to be more smoke and mirrors than anything substantial, with few buildings symbolizing the city’s uncertain office future more than Sixth and Guadalupe, located at 400 West Sixth Street in the heart of downtown.
The 66-story office tower was originally scheduled to be the regional home for Meta (the parent company of Facebook) when it opens later this year. But the social media firm canceled its plans to lease inside the building and is now trying to fill nearly 600,000 square feet of office space through subleases.
The false promise surrounding Sixth and Guadalupe seems to speak to the entire city.
“More than 15 million square feet (16.6 percent of stock) have [been] delivered in Austin since 2018,” noted the Yardi Matrix report. “Furthermore, although [Austin] outperforms other markets in office utilization, it is still only at about 60 percent of pre-COVID levels.”
Not surprisingly, as vacancies rise, sales of office buildings have plummeted across the nation.
There have been only $25 billion in sales in the first three quarters of 2023; the first three quarters of 2022 saw more than $60 billion in office sales nationally, according to Yardi Matrix.
This is a sharp decline compared to the health of the market only two years ago, when the fourth quarter alone saw more than $40 billion in office sales in 2021.
The lone bright spot for office development is in the life sciences sector, which accounts for 22 percent of the 106.5 million square feet of space currently under construction, according to Yardi Matrix.
Life sciences has been supported by the needs of an aging population and recent breakthroughs in vaccine production and health care.
But while central business district office space is waning in the post-pandemic landscape, suburban offices have become increasingly attractive.
Yardi Matrix argued that the traditional notion of suburban office — low-lying buildings surrounded by acres of parking lots — is on its way out, and new, mixed-use locations with restaurants, shopping and entertainment options for employees are now best suited for an attractive repurposing.
“Firms moving their operations to the suburbs are increasingly looking for offices in vibrant mixed-use locations, often in thoughtfully planned developments that are designed from the ground up as live-work-play hubs meant to mimic city centers,” concluded the report. “Workers, especially younger ones, want walkability and amenities near their offices, even in the suburbs.”
Brian Pascus can be reached at email@example.com.