Office Market Stabilizes Through Stalling Office Vacancies
The sector’s been through tricky times of late, but demand for premium office space is driving some growth.
· Direct asking office rents averaged $38.62 per square foot in July, up 1.2 percent from the same period last year.
· Office vacancy declined slightly, averaging 15.5 percent across the top 50 U.S. office markets.
· Under construction pipeline shows early signs of shrinking.
· Investors continue to pay record prices for amenitized assets in key markets.
National office asking rates recorded a two-cent increase from June 2021, continuing their upward trajectory and further strengthening the flight-to-quality trend amplified by the pandemic. Despite return plans to in-person work falling through due to the rising Delta variant of COVID-19, companies are keeping their interest alive in highly amenitized, Class A space. This is more noticeable in markets such as Los Angeles, which recorded an increase of 8.1 percent year-over-year in July ($41.62 per square foot). The Bay Area ($55.80 per square foot) and Tampa ($29.70) came second in terms of rent growth, with office rates increasing by 6.2 percent.
Office vacancy continues to hover above the 15 percent rate starting with March 2020. Although 190 basis points higher than in July 2020, it fell 10 basis points from the previous month—a minor month-to-month change—putting an end to striking fluctuations in vacancy rates. Out of the top 25 markets covered by CommercialEdge, only Seattle (190 basis point-increase since March) and San Francisco (170 basis points) had significant increases in vacancies recently.
Some 157.2 million square feet of office space was under construction across the nation as of July. The active pipeline has fallen by more than 7 million feet (4.5 percent) since January 2021. Roughly 34 million square feet was completed in the first seven months of the year. A little over 27 million square feet of office space had started construction year-to-date in July, far less than the 61.7 million square feet started in 2020 and the 87.1 million square feet the year prior. Judging from the speed at which construction is progressing, the pipeline will likely shrink in the coming years.
Read the full Matrix Office National Report-August 2021