The year 2022 has been a mixed bag for the office sector. The continuing trend of tech companies downsizing their office footprints and reducing their employee base has had a massive impact across the board, most notably in traditional gateway markets. Big names like Meta have been closing or subletting offices across the country.
However, other tech giants such as Apple have been keen to return most of their workforce to the office. Meanwhile, many other companies have shunned the idea of working fully remotely, promoting hybrid schedules as a more viable solution.
As such, the demand for office space from the tech sector, one of the most significant drivers of office leasing in recent years, hasn’t disappeared entirely. In their latest monthly report, CommercialEdge analyzed the state of the U.S. office market at the close of November 2022. Below are their findings:
Vacancy Rates on the Rise as Companies Downsize
The number of companies, particularly tech firms, that have massively downsized in the past few months has undoubtedly impacted vacancy rates across the country. Of 120 markets nationwide, 86 have seen vacancy rates steadily increasing.
At the end of November, the national vacancy rate stood at 16.2%, 10 basis points higher than the previous month and 110 basis points more than a year ago. With so many companies looking to downsize, this figure will likely continue to rise as we enter the new year.
Big names with large-scale downsizing plans include Meta, which will sublease existing space and pull out of new lease agreements across the country. Salesforce is also set to sublease around 40% of its headquarters in San Francisco.
Listing Rates Continue to Slump Year-over-Year
As vacancy rates rise, listing rates continue to drop relative to previous years. While the national average full-service equivalent listing rate was up by $0.12 from October, it’s seen a 3.1% decrease compared to 12 months ago.
The decrease is primarily due to the lower value of Class B and C spaces. Class A and A+ office rates have increased by 1.6%, averaging $46.96 per square foot. At the same time, the value of class B spaces dropped by 6% to a rate of $30.30 per square foot, and class C spaces have seen an almost 13% decline since last year, with the average value sitting at $23.05 per square foot by the end of November.
This strongly indicates that while businesses are looking to downsize, they’re willing to pay more for higher quality, more environmentally-friendly spaces.
Evolution of U.S. Listing Rate by Asset Class
New Office Starts Set to Surpass Previous Year
Despite the rapid downsizing of the tech sector, which has caused delays and cancellations of new development projects, the office sector is actually on track to boast more square feet of starts in 2022 compared to the previous year. Over 56 million square feet of new office space broke ground in November this year.
That’s added to the 132.3 million square feet recorded at the end of October, or 2.1% of the existing stock. In addition, a further 6.3% was in the planning stage. These are impressive stats in the face of the challenges of hybrid work, tech sector shrinkage, and a looming recession.
Manhattan Leads in Office Transactions
Over the first 11 months of 2022, office transactions totaled $80.4 billion. Manhattan led the way by a fair margin, boasting $5.88 billion in sales and making it the only market to surpass $5 billion. However, Boston, the Bay Area, Washington D.C., and Dallas also showcased impressive figures, each breaching the $4 billion mark.
By the end of November, the year-to-date national sale price averaged out at $253 per square foot. However, San Francisco recorded $940 per square foot, making it the national price leader by a considerable margin.