Office Vacancies Are High But Investors Don’t Seem To Care

Vacancies for office properties in the top 50 markets across the US hit an eye-popping 16% in April, but investors are still bullish on the sector, with activity for well-positioned assets driving the price per square foot for office properties to an all-time high. 

New data from Commercial Edge shows that office vacancy rates increased 290 basis points year-over-year last month, a trend that was driven largely by the millions of square feet of new office space that broke ground prior to the COVID-19 pandemic now coming online. The decrease also reflects the fact that some leases were allowed to expire as companies continue to adjust their return-to-work strategies and physical space needs. The amount of sublease space also shot up in San Francisco (up 4.4% over the previous month), the Bay Area (up 3.7%) and Seattle (up 3.7%).

Average office lease rates across the US are continuing their slow slog upward and are now up 0.2% year over year to just below $40 per square foot. The average full-service equivalent listing rates across the 50 markets surveyed by Commercial Edge span from more than $21 per square foot to roughly $83 per square foot. LA showed the most growth year over year, with a 6.5% increase to $40.65 per square foot, followed by Washington D.C. (an increase of 4.8%) and Boston (an increase of 4.1%). On the other end of the spectrum, San Francisco office lease rates declined 5.1 year over year, followed by Houston.   

Despite those relatively depressing figures, however, investor activity is at a high. Overall sales volume continues to appear low when compared to pre-pandemic levels, but “recent transaction data continues to prove that buyers are not shying away from spending top dollar on high-quality, high-potential office assets,” Commercial Edge analysts note. 

As a result, April’s sale prices reached an all-time high of $304 per square foot on average—and since the beginning of 2021, 520 transactions totaling $17.8 billion have closed coast to coast. Deals in the Bay Area accounted for nearly $3 billion of the nationwide total, followed by San Francisco ($2.6 billion).

“Rather than be intimidated by the general discourse on economic uncertainty, commercial real estate investors have maintained their focus on identifying and closing the right deals for their acquisition strategies,” the report notes. 

About 20 million square feet of new office product has been delivered thus far in 2021, and 70% of projects under construction are in urban submarkets. About 162 million square feet of new product is currently under construction, with 115 million square feet located in central business districts and other urban submarkets.