National Office Vacancy Hits 19%, Sales Decline by 39M SF: Report

In a year that has seen the narrative around the health of the U.S. office market steadily improve, year-end data from a commercial real estate data firm points to an asset class still beset by high vacancy, declining sales prices, and low delivery and construction metrics. 

A year-end report from CRE analytics firm Yardi Matirix analyzing all U.S. office space exceeding 25,000 square feet found that the average sales price of office deals has fallen 9 percent from its average price in 2023. Moreover, the pipeline of new office supply remained stagnant in 2024, as only 9.1 million square feet of new office space was developed through November. 

Nationwide office vacancy currently stands at 19.4 percent, up 120 basis points year-over-year. 

“With vacancy, the one word we use is ‘stabilizing,’ ” said Doug Ressler, manager of business intelligence for Yardi and author of the report. “We think vacancy will stabilize at the point it’s at right now, but it will slowly begin to come down. We don’t see that decline being dramatic over the next 12 to 18 months.”

Ressler said most vacancies nationwide have been limited to Class B and Class C offices, and that fields like medical, banking and law firms have maintained their high square-footage averages. 

“First of all, what we see is a concentration [of occupancy] in the amenity-rich trophies, not so much in the B’s and the C’s,” he said. “What we also see, in looking at return-to-work, is you have this split between those who populate office on a five-day basis, like medical fields, and fields like the tech industry, which has adopted a hybrid-work model.”

Nowhere has the decline in office space been more felt than in the life sciences sector. Life science construction was the darling sub-asset class of the office market during the early years of the pandemic, as more than 30 million square feet of new lab office space broke ground between 2021 and 2023, according to Yardi Matrix. 

But in the last 12 months, only approximately 948,000 square feet of new lab space broke ground across the nation. (And some owners are even converting life science space to office.)

“The people who converted offices to life sciences aren’t doing well, especially in the Boston market,” said Ressler. “People in the Boston market are asking, ‘Do we need to reconfigure or downsize the existing life sciences that we created?’ It’s something that we’ve recently seen and are watching pretty closely in Boston, San Diego and Philadelphia, areas rich in life sciences.”

On the bright side, sales of office properties ticked up compared to last year. But sales were still down from their 2019 and 2021 peaks, which saw $40 billion in office sales in both of the fourth quarters of those years alone. 

Yardi Matrix recorded $32.6 billion in office sales through the end of November, with

properties trading at an average of $179 per square foot That’s slightly up from the $30.1 billion of office sales recorded through November 2023, when office properties traded at an average of $193 per square foot. 

Of course, certain markets have done better than others in terms of supply, absorption and investment sales.

New York City, particularly Manhattan, led the way in national sales in 2024, with more than $3.8 billion in transactions occurring through November. The Big Apple was followed by Washington, D.C. ($2.5 billion in office sales), the Bay Area ($2.1 billion in office sales), Los Angeles ($1.7 billion in office sales) and Dallas ($1.3 billion in office sales), according to Yardi Matrix.  

Markets that struggled to sell office space in 2024 included Orlando ($198 million in sales), Nashville, Tenn. ($228 million in sales), Philadelphia ($381 million in sales) and Chicago (only $948 million in sales). 

“You look at New York, and it’s doing pretty good right now, but then again, Chicago is not,” said Ressler. Sales volume depends on the size of the market and specifics within each market, such as the sizes of the properties and whether they are near transit hubs, he said. 

One element dragging down sales has been the erosion of new supply and low absorption into the market: Builders aren’t looking to deliver new space into an asset class when interest rates are high and as demand and investment sales simultaneously crater. 

The pipeline of new office space constructed shrank by 39 million square feet year-to-date and currently stands at 57.8 million square feet under construction. Last year at this time, 99.6 million square feet of office space was under construction nationally, per Yardi Matrix. 

Boston has been the top market in the nation in new office starts. Beantown has seen 9.2 million square feet of new office rise in 2024, while San Francisco is second at 3.8 million square feet. Manhattan, surprisingly, sits fifth among all major U.S. cities with 2.7 million square feet under construction, a mere 0.6 percent of national office stock. 

Why the tepid building patterns? 

“It’s the viability of work-from-home and developers asking, ‘If I’m going to put a shovel in the dirt, I better understand my five-year vision. Will it give me the revenue I need?’” said Ressler. 

“You’re looking at the cost of construction has gone up, tariffs could make that even higher … and the [higher] interest rates have cooled really everything,” he added.  

Brian Pascus can be reached at bpascus@commercialobserver.com.