The state of the office sector remains unsettled in 2023, and predicting its future is challenging. But with December data just in, CommercialEdge examined the past year to unearth current industry trends and remove some of the guesswork. Everything is incorporated in their latest National Office Report, covered below:
Listing Rates Remain Steady as Vacancy Rates Continue to Rise
Office vacancy rates have consistently risen since the pandemic, with a national average of 16.5% at the end of December, 90 basis points higher than the previous year. Meanwhile, listing rates have remained relatively steady. The average full-service rate sat at $38.19 nationwide last month, and while that’s 0.7% lower compared to 2021, it’s a 16 cents month-over-month increase.
While it’s clear that listing rates have yet to fall in response to increasing vacancy rates, there’s a reasonable explanation. With a greater demand for higher-quality spaces and plenty of options hitting the market, fewer businesses might be purchasing office space, but those that do are spending more. As a result, listing prices remain rather stable.
Indeed, Class A and A+ office spaces have seen a 1.9% rise since 2021, reaching a national average listing price of $46.69.
Supply Slowdown Set to Continue into 2023
On a national level, the office development pipeline continued to slow throughout 2022, with a total of 135.3 million square feet under construction at the close of the year. This amounted to just 2.1% of the existing stock. Economic uncertainty, new norms regarding company working practices—notably reduced office footprints—and rising capital costs are some of the primary reasons for this slowdown.
A total of 261.3 million square feet of new office space was in the planning stage at the end of last year, representing 4% of current stock. However, due to the above reasons, real estate outlooks predict that many of these plans will be delayed or outright canceled.
Despite this deceleration, though, office developers haven’t given up. Instead, many have adjusted the way they work, focusing on building high-quality, well-located buildings in a bid to be more attractive to companies. As a result, certain regions have been able to buck the trend, with markets like Austin adding 5.7 million square feet of new office starts during 2022, more than 2 million square feet compared to 2021.
Transactions Fall Nationally after a Slow Year
While the numbers are not yet final, CommercialEdge has recorded $83.6 billion in office transactions throughout 2022. This works out at an annual average of $247 per square foot and is a considerable drop compared to 2021, which boasted $116 billion in total and an average of $280 per square foot.
With a potential recession on the horizon and high-interest rates, 2023 could see office sales shrinking even further. Economic uncertainty will likely result in a growth in the bid/ask spread, reducing sales considerably.
But while overall sales were down, several markets have performed well over the previous year. Manhattan closed more than $6 billion in office transactions in 2022, taking it well ahead of the competition. Second on the podium, the life science hub of Boston recorded $4.71 billion, closely followed by Dallas with $4.66 billion. Meanwhile, San Francisco remained highest in terms of pricing, with office space selling for an average of $930 per square foot.
Office Market News: A Regional Breakdown
Western Markets Boast Some of the Highest Office Sales Prices
With a price per square foot of $930 in 2022, San Francisco topped the national leaderboard in terms of sales prices, despite a vacancy rate of 19.3%, the highest in the region. Also ranking high for sales prices, Seattle took third place at $542 per square foot, while the Bay Area, LA and San Diego followed at $439, $428 and $427, respectively. These sale prices have certainly tempted local developers, who have continued to break ground in western markets, while other areas in the country have seen a sharp slowdown.
For example, San Diego’s construction pipeline accounted for 5.1% of its stock, while both San Francisco and Seattle’s accounted for 4.2%. Meanwhile, the combined under-construction and planned office projects in the Bay Area equated to a whopping 16.6% of its existing footprint.
Midwest: Chicago Remains Attractive to Investors
Even though Chicago had one of the lowest sales prices in the country at $187 per square foot, it managed to close on almost $3.2 billion in office deals in 2022, the eighth highest nationwide. The Windy City remained an attractive prospect for investors, despite a total vacancy rate of 19.5%.
In addition, Chicago ended the year with 2.7 million square feet of new office space under construction, which amounted to 0.9% of its existing stock. A further 5.3% is currently in the planning stages.
In other parts of the region, the Twin Cities ranked as the third-lowest metro in terms of office space under construction in 2022. The 632,500 square feet of projects that had broken ground represented just 0.5% of the existing stock.
South: Sunbelt Sees Continued Development
Southern markets accounted for the top four largest construction pipelines in the country on a percentage-of-stock basis: Austin (8.7%), Charlotte (6.3%), Atlanta (6.3%) and Nashville (5.4%). In particular, Austin will increase its footprint by 7.7 million square feet, with much more (15%) in the planning stage. And while a nationwide construction slowdown is expected in 2023, there’s no reason to doubt that most of Austin’s planned projects will break ground over the next 12 months.
Unfortunately, southern markets like Tampa and Orlando experienced slow sales, low listing prices, and included some of the smallest construction pipelines in the country.
Northeast: Largest Construction Pipeline and Most Sales in Manhattan
With 13 million square feet under construction, Manhattan lead in terms of size regarding new developments, even though that represented just 2.8% of existing stock. The city also took second place for sales price per square foot, at $733. And at $76.09 per square foot, it was also the priciest market for office rent in 2022.
Elsewhere, Boston continued its construction boom, with just under 12.7 million square feet having broken ground. This will boost existing stock by 5.3%, while a further 6.2% remains in the planning stage. At 8.9%, Boston also enjoyed the country’s lowest vacancy rate in 2022. Meanwhile, the average vacancy rate in Manhattan increased by 2.41% year-over-year, the fastest in the region.
Industry Trends to Keep an Eye on in 2023
As we move into the new year, many trends from the previous couple of years are set to gain traction as new working habits become embedded. For example, the demand for flexible coworking spaces has huge growth potential. Indeed, even companies that have switched to fully remote working policies will still need the occasional use of physical office space for meetings, staff training, team building, and face-to-face collaboration.
With vacancy rates steadily rising and low housing supplies across the country, the talk of converting abandoned office buildings into residential and mixed-used properties continues into 2023. However, the same challenges remain, with many offices not being suitable for conversion to housing.
As such, developers may need to reconsider their approach. Other uses for old office space have been found, with spaces in markets like Chicago being converted into everything from E-Gaming Arenas to storage facilities.
