June National Office Update: National Listing Rate Rests at $37.72
The most recent national office report by CommercialEdge highlights a clearer outlook on the office sector, and investors are beginning to come to terms with lower property valuations and office utilization.
One of the main drivers of the high, industry-wide vacancy rates (primarily due to remote and hybrid work models) is becoming entrenched in the job market. To that end, office access control company Kastle has been analyzing office attendance rates since the pandemic. Its Back to Work Barometer has not significantly changed in the last year across the top 10 surveyed markets, which indicates a stabilization in the remote and on-site distribution.
Meanwhile, despite higher for longer lending rates, the anticipated wave of distress has largely not materialized. Rather, long lease terms and renegotiations have caused most delinquencies to arise gradually, instead of all at once — although distress may become more noticeable through the rest of 2024 and 2025, according to CommercialEdge. Additionally, a lack of comparable sales has compounded with difficulties in accessing credit, which has led to low sales activity, even as a historically low supply pipeline is weakening its effects.
“Acceptance of the current office situation is becoming more widespread,” said Peter Kolaczynski, director at CommercialEdge. “We anticipate more finality at the individual property level with an increase in distressed assets showing up. With this idea of ‘acceptance,’ we would also expect more creativity and ingenuity on how to handle this glut of space as the industry recognizes we are still in the early phases of what is likely to be a multi-decade reshuffling.”
National Listing Rate Reaches $37.72, Down 1.7% Y-o-Y
At the national level, the average full-service equivalent listing rate rested at $37.72 per square foot at the end of May. That represented an increase of six cents compared to the previous month, but a drop of 1.7% year-over-year (Y-o-Y).
While the flight to quality continues to be evident in office vacancies by class, rates for A and A+ office space have nevertheless dropped by 4.3% Y-o-Y, stopping at $44.91 per square foot. At the same time, Class B space went for $30.52 per square foot, up 0.5% Y-o-Y, while Class C space listing rates increased 1.2% to $23.65, on average. Notably, the drop in Class A and A+ office listing rates was primarily due to declining demand for offices in central business districts, which fell by almost 7% Y-o-Y as tenants continue to reorient themselves toward more convenient office locations in urban and suburban areas.
More precisely, Manhattan, N.Y., claimed the highest listing rate as of May with $71.30 per square foot, representing a yearly drop of 3.1%. Then, San Francisco and the Bay Area were the next-most expensive locations with rates of $60.79 and $53.70, respectively. However, the largest drop of 11.1% was recorded in San Diego as rates ended at $42.54 per square foot, while the life sciences-rich market of Boston saw listing rates increase by 10.8% to reach $46.71 in the same timespan.
U.S. Office Sales Surpass $10B Year-to-Date in May
Office transactions totaled $10.2 billion year-to-date as of the end of May for an average of $165 per square foot. Even so, Manhattan — the office market that historically has held the first spot for transaction volume — fell all the way to fifth place so far this year, seeing $570 million in sales by the end of May. The nationwide decrease in sales was also even sharper in Manhattan. Granted, sales volume was also hit by drops in average sale prices, which have fallen by 66% compared to 2023.
Washington, D.C. ($1 billion); the Bay Area ($795 million); Boston ($761 million); and Houston ($718 million) were the four markets that surpassed Manhattan in sales volume year-to-date.
For more details and additional information, consult CommercialEdge’s complete national office report.
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