Office Sector Adapts Amid Market Shifts

The office sector is stabilizing after years of turbulence, with investors gradually adjusting to new valuations and utilization norms, according to the latest CommercialEdge report.

Office utilization metrics, such as Kastle’s Back to Work Barometer, have plateaued, reflecting the permanence of remote and hybrid work. The Federal Reserve’s decision to cut interest rates only once this year adds pressure on office owners seeking to extend or renegotiate loans.

While anticipated widespread distress hasn’t hit the office sector all at once, challenges persist. Long lease terms mean some tenants are still under pre-pandemic agreements, delaying decisions on downsizing. Office CMBS loan delinquency rose to 6.9 percent in May, up from 4.0 percent the previous year, indicating growing distress.

A silver lining for office owners is the decline in new office supply. With only 6.2 million square feet of office starts tracked in 2024, the competition for tenants is decreasing, offering some relief in a weak market.

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In May, office-using sectors gained 43,000 jobs, marking the second-largest increase in the past year, just behind January’s 52,000 additions. Office employment rose only 0.3 percent year-over-year. Growth in the financial activities and professional and business services sectors has been stagnant since early 2023 but still managed to add workforce. Conversely, the information sector has declined for 12 straight months, losing 36,000 workers by May 2024, a 1.2 percent decrease.

Some 83.8 million square feet of new office space were underway nationwide at the end of May, accounting for 1.2 percent of total stock, CommercialEdge shows. At the same time, a total of 18.5 million square feet have come online in the first five months of the year.

As of May, Boston had 13.6 million square feet of office space underway, accounting for 5.4 percent of existing stock. San Francisco had close to 5.2 million square feet under construction (3.2 percent of stock), followed by Dallas (4.7 million square feet, 1.7 percent of stock). Austin had 4.4 million square feet underway, or 4.7 percent of stock, while San Diego had 4 million square feet of office space underway, accounting for 4.2 percent of stock. Total office investment in the first five months of 2024 totaled $10.2 billion, while the average sale price for a property stood at $165 per square foot.

Listing rates dip, vacancy rates climb

National full-service equivalent listing rates averaged $37.72 per square foot in May, a 170-basis-point decrease from the previous year but 6 cents more than the prior month, CommercialEdge data shows. Notably, Dallas (6.6 percent), Miami (6.2 percent), Atlanta (4.7 percent) and Detroit (4.5 percent) saw significant year-over-year increases in average in-place rents.

The national office vacancy rate stood at 17.8 percent at the end of May, an 80-basis-point increase from the same period last year. Tech market vacancy rates have surged since late 2022: San Francisco’s rate rose to 25.5 percent, the Bay Area’s to 20.0 percent, while Seattle’s vacancy reached 23.0 percent at the end of May.

Read the full CommercialEdge office report.