Office Asset Values Slide Amid Challenges
More than 20 percent of assets sold since the start of 2023 traded at a lower price than in their previous sales, the latest CommercialEdge report shows.
The post-pandemic landscape and rising interest rates have significantly reduced office property values, with an average decrease of at least 25 percent—and even larger drops—for older or poorly located buildings, the latest CommercialEdge office report shows.
In 2023, office properties in the MSCI/PREA U.S. ACOE Quarterly Property Fund Index lost 23.5 percent in value, with a three-year average decline of 10.5 percent. More than 20 percent of the 1,700+ office properties sold since 2023 fetched lower prices than their previous sale, with notable declines in Chicago, Washington, D.C., Houston, Portland, Ore., and Denver.
High-quality buildings saw a higher rate of price reductions, with 42 percent of Class A or A+ rated properties declining in value. Central Business District offices have suffered the most, with 35 percent trading at lower prices. Suburban properties also witnessed value declines, but less so, at 21 percent. The trend of discounted office sales is expected to continue into 2024, driven by high interest rates, decreasing demand and the closing gap between asking and selling prices, alongside an increase in loan defaults and lender caution.
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While the labor market continues to outperform expectations, office-using sectors are not keeping pace; National non-farm employment grew by 1.9 percent year-over-year in January, compared to just 0.8 percent in office-using sectors. After outpacing overall job growth from June 2021 to November 2022, office-using sectors have since grown more slowly every month. This slowdown is geographically widespread, with office job levels declining in 56 of 120 markets surveyed by CommercialEdge.
The national office vacancy rate was 18.0 percent at the end of January, a 130-basis-point increase from the same period last year. According to CommercialEdge, vacancy rates increased the most in markets with a significant proportion of remote workers such as San Francisco (490 basis points year-over-year), Denver (390 basis points), Seattle (450 basis points) and San Diego (310 basis points).
National full-service equivalent listing rates averaged $37.35 per square foot in January, down 180 basis points year-over-year and 29 cents less than in the previous month. The highest year-over-year increases in average in-place rents were recorded in New Jersey (5.4 percent year-over-year), Tampa, Fla. (5.1 percent), Atlanta (3.6 percent), Detroit (1.9 percent) and Denver (1.5 percent).
Life sciences dominate office development
The under-construction pipeline totaled 97.2 million square feet of new office space underway at the end of January, accounting for 1.4 percent of total stock, CommercialEdge shows. Since the pandemic, total office construction has decreased, however life science projects are increasingly dominating office development. In 2023, life science accounted for 27.8 percent of all office starts, a significant rise from 7.3 percent in 2019 and slightly up from 26.9 percent in 2022.
As of January, Boston had 14.4 million square feet of office space underway, accounting for 5.8 percent of total stock. Austin and San Diego had 4.9 million square feet of office space under construction, accounting for 5.3 and 5.2 percent of stock, respectively. Nashville came in fourth with 2.7 million square feet underway, representing 4.7 percent of total stock.
Total office investment in the first month of 2024 totaled $1.5 billion. At the same time, the average sale price for a property stood at $195 per square foot. Transaction activity was concentrated in the Bay Area ($259 million), San Diego ($142 million), Austin ($112 million), Dallas ($109 million) and New Jersey ($104 million).
Read the full CommercialEdge office report.
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