July Office Market Stats: 76.9MSF Under Construction Nationally, Vacancy Rests at 18.1%
According to commercial real estate (CRE) listing and research platform CommercialEdge, 76.9 million square feet of office space was under construction at the end of June 2024, marking a significantly shrinking supply pipeline in the industry. The amount currently under construction represents a 1.1% expansion of current stock.
Additionally, new starts are well below the level necessary to maintain the previous size of the pipeline. Year-to-date in 2024, 23.5 million square feet worth of office spaces have opened their doors across the U.S., while new projects that broke ground since the start of the year total only 6.9 million square feet, indicating a considerable slowdown in demand for new office space since the pandemic and remote work. Accordingly, CommercialEdge forecasts deliveries to continue dropping in the next two years to as little as 27 million square feet in 2026 before rebounding slightly to 28 million in 2027 and growing more in further years.
Notably, until this year, the life sciences industry was propping up development in the larger office sector with healthy investor appetite and considerable speculative development across key life sciences markets. Specifically, in 2022 and 2023, life sciences accounted for more than one-quarter of all new office space breaking ground. But, the place of life sciences within the office sector returned closer to historical averages this year with just 9% of new office space footage started in 2024 being in life sciences properties. Consequently, with the life sciences boom waning, office space development is expected to suffer further setbacks.
National Vacancy Increases 100 bps to 18.1%, San Francisco Records 25.4% Vacancy Rate
Also illustrating the drop in demand for office space since the adoption of remote work, the national office vacancy rate rested at 18.1% at the end of June, marking a 100-basis-point (bps) increase year-over-year.
At the market level, San Francisco, Houston, and Seattle recorded the highest vacancy rates at 25.4%, 23.8% and 23.2%, respectively. The largest year-over-year increases were in Dallas and San Francisco (up 430 bps), as well as Los Angeles (up 350 bps to 17%).
At the opposite end of the spectrum, the markets with the lowest vacancy rates were Miami (12%), Boston (12.8%) and Tampa, Fla. (13.3%).
Regional Stats: San Francisco Headlines Western Listing Rates Despite High Vacancies, Dallas & Austin, Texas, Lead Office Construction in South
In the Western U.S., San Francisco recorded the highest average listing rate of just less than $61 per square foot, despite simultaneously having the highest national vacancy rate of 25.4%. Yet, San Francisco’s total year-to-date sales volume of $155 million was completely eclipsed by that in the rest of the Bay Area, which saw more than $1 billion in sales close thus far this year. For example, in Q2, chipmaker Nvidia acquired a Santa Clara, Calif., tech campus for $374 million to significantly contribute to the region’s total sales.
Meanwhile, in the South, Austin, Texas, trailed Dallas in terms of square footage under construction with 4.33 million square feet of space compared to the latter’s 4.96 million. At the same time, Austin also recorded the region’s second-highest average listing rate at $42.52 per square foot, surpassed only by Miami’s $49.79. Even so, the largest sales volume in the South still belongs to the Washington, D.C. market, which has seen around $1.34 billion change hands in office transactions so far in 2024.
In the Northeast, Manhattan, N.Y., reclaimed the top spot for office sales volume, rising from $570 million in May to $1.4 billion in June. This was primarily due to one major sale — the purchase of 980 Madison Ave. by a Bloomberg affiliate for a reported $560 million. Boston followed in sales volume with $803 million and an average sale price per square foot of $265.
Meanwhile, the Chicago market recorded the Midwest’s largest sales volume at $345 million, although it posted the lowest average price per square foot nationally at just $89. It’s worth mentioning here that the office sector in the region is experiencing increased distress, which is contributing to its below-national average listing rates.