U.S. Office Market Slid Further in January, Delaying Recovery Hopes in 2024

Space dedicated to life sciences makes up a growing share of total office development nationally

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Office real estate values and asking rents continued their incremental descent around the U.S. in January, forcing deep discounts and fewer transactions, and weakening market fundamentals. 

Higher interest rates and waning user demand has tightened its grip on the market. A new report from Yardi’s CommercialEdge shows the average U.S. office property value was down at least 25 percent year-over-year, with larger declines for older and poorly located buildings. Compared to 2022, things are much worse.

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“The lack of transactional volume makes comp identification more difficult, but lower-end buildings not in prime locations are suffering and we expect that trend to only accelerate,” Peter Kolaczynski, director at CommercialEdge, said in a statement.

Nationally, $1.52 billion in office sales closed in January for an average price of approximately $195 per square foot. By comparison, January last year saw $1.93 billion in office trades at $202 per square foot (which was the start of a year in which transaction volume fell 60 percent overall). The same month two years ago registered $5.88 billion in office asset sales for $288 per square foot.

The national average listing rental rate was $37.35 per square foot per month in January, according to CommercialEdge, an annual decrease of 1.8 percent and down 29 cents from December. The national office vacancy rate was 18 percent, an increase of 130 basis points year-over-year.

  1. Manhattan’s average asking rent was $68.28 per square foot per month at the end of January. That’s still the most expensive in the nation despite a decrease of 9.9 percent compared to last year, while vacancy increased 100 basis points in that period to 16.5 percent.
  2. Washington, D.C.’s listing rate ticked down 30 basis points year-over-year to $40.39 per square foot while vacancy increased 340 basis points to 17.1 percent.
  3. Miami’s average listing rate declined 2.7 percent to $45.96 per square foot, while vacancy increased to 12.4 percent.
  4. Los Angeles’ average asking rent was $41.48 per square foot, a 270 basis-point drop compared to last year, while also seeing a 200 basis-point increase in vacancy rate to 16.7 percent.

Life sciences dominates
Nationally, 97.2 million square feet of office space was under construction in January, and space dedicated to life sciences makes up a growing share of that total development. Life sciences-related projects in 2023 accounted for 27.8 percent of all office starts (11.5 million square feet), which was a slight increase from the 26.9 percent share in 2022 (17.3 million square feet) and another spike compared to the 7.3 percent share in 2019 (7.2 million square feet).

Indeed, the Boston area — the U.S. capital of life sciences real estate — has a whopping 14.5 million square feet of office space under construction, per CommercialEdge. That’s more than double the amount of office space underway in San Francisco, which has the second-highest amount in the pipeline, and, together with the surrounding Bay Area (seventh-biggest office pipeline), happens to make up the second-biggest life sciences market in the country.

“While remote work and turmoil in the tech sector have wreaked havoc on offices in central business districts and urban submarkets, life science development continues to thrive in outlying portions of San Francisco,” CommercialEdge reported. “Since July 2023, the market has recorded 1.6 million square feet of starts on properties that contain at least some life science components, all located along the peninsula between San Francisco and Silicon Valley.”

Silicon Valley also led the nation in office property sales in terms of dollar volume in January with $259 million (despite zero sales in the city of San Francisco itself), led by cybersecurity firm Fortinet’s $192 million acquisition of a campus in Santa Clara from Texas Instruments (which is moving to another space in the same city). 

L.A. recorded $71 million in office sales in January at $1,406 per square foot. Manhattan saw $51 million in trades for $1,094 per square foot.

“Discounted office sales will rise in 2024 as rates stay high and occupier demand shrinks,” CommercialEdge’s report reads, adding an increase in loan defaults hints at “continued upheaval in the sector. 

“The bid/ask gap is narrowing as sellers capitulate to the reality of higher-for-longer rates and weak fundamentals. Meanwhile, more borrowers are walking away from underwater loans, and lenders are increasingly reluctant to extend loans indefinitely.”

Gregory Cornfield can be reached at gcornfield@commercialobserver.com.