Demand for Specialty Product Boosts Office Sector

The national office market still faces challenges according to CommercialEdge’s July National Office report. The national average full service equivalent listing rate was $38.60 in June. That’s a 1.1 percent increase from the prior year, but $0.06 lower than in May. The national vacancy rate was 15.6 percent in June, up 240 basis points year-over-year, and unchanged since May.

Same store rates grew the most in the Bay Area at 7.5 percent year-over-year, followed by Denver (5.6 percent) and Boston (5.2 percent). These markets have all increased listing rates despite rising vacancy over that interval. The Bay Area saw its overall vacancy rate increase by 260 basis points year-over-year, while the average full-service rate increased 4.9 percent over the same period. This is due to corporate relocations out of the market increasing the availability of high-quality space.

Nationally, there was 160.7 million square feet of office space under construction as of June. According to CommercialEdge, long project delivery times mean that the supply pipeline is reflective of pre-pandemic trends. Some gateway markets that are suspected to see the worst declining demand for office space still had robust pipelines. Boston had 13.5 million square feet under construction, accounting for 5.5 percent of existing stock. Manhattan (20.9 million, 4.3 percent) and San Francisco (6.4 million, 4.1 percent) were also adding large amounts of space at a time when future demand is uncertain.

According to CommercialEdge, the Sun Belt saw strong investor interest despite tepid transaction volume in most markets. Miami had $1.25 billion in transaction activity in the first two quarters of 2021, a 223 percent increase over the $386.6 million over the entirety of 2020. Atlanta had $1.14 billion, a 33% increase over the same period.

CommercialEdge reported a high demand for lab space in July. Interest in conversions also generated transaction activity. The largest sale of 2021 to date was the $1.2 billion purchase of 401 Park in Boston. The asset was acquired was purchased with the intent of conversion into lab space. While there is opportunity in lab space conversions, this is not feasible in all general office buildings and markets, as demand for this asset type is still very much dependent on a market’s economic profile.

There was growing interest in conversions into multifamily. The New York State legislature recently passed a bill to allow New York’s Housing Trust Fund Corporation to purchase vacant office and hotel properties for conversion to affordable housing. CommercialEdge believes that this may serve as a template for other markets, should it prove successful.

Read the full CommercialEdge report, here.