Office Investment Sales Have Not Been Pretty This Year

The national average sale price of an office building has slumped 22%.

The value of office buildings sold in the U.S. in the first five months of the year dove by almost two-thirds from $35.3 billion as of May 2022 to $11.9 billion as of May 2023, according to a comparison of data from CommercialEdge’s National Office Reports. 

Furthermore, the national average sale price of an office building slumped 22% between May 2022 and May 2023 from $250 to $195 per SF, the company’s June 2023 report noted. It is based on an analysis of 25 metro areas.  

Manhattan has come out on top so far this year with total sales of $1.13 billion, followed by Los Angeles with $1.013 billion. At the same time Los Angeles also recorded one of the steepest price drops in the nation, slumping 43% from $412 last year to $237 per SF this year.  

Other areas in the top 10 for sales volume were New Jersey, Boston, Washington, DC, Chicago, Houston, Tampa, San Diego and Dallas.

Sales activity picked up pace in Chicago in the first five months of 2023, fetching a total of $588 million, the sixth-highest volume in the nation. But this was achieved at an average price of $109 per SF, well below the $195 national average. The metro also had more than 3.5 million SF of office space underway – 1.2% of its existing inventory.

By comparison, Twin Cities investors paid an average $229 per SF for office space, for a total of $187 million. The area also boasted one of the lowest supply pipelines nationwide, trailing only Portland. However, vacancy rates rose 4.5%.

Washington, DC, with $609 million in sales, had the third highest average sales price in the U.S. at $248 per SF. Austin led the nation with a price of $356 per SF totaling $264 million, followed by Miami at $262 per SF bringing in $280 million.

There is one bright spot in the office market: the life sciences sector.  “Even as investment in the industry has cooled in the last year, demand for new lab space has stayed solid, as the property type is immune to remote work and, for the most part, is purpose built,” the report observed.

More than 120 buildings with at least some life sciences components are being built nationwide, it noted. The principal beneficiaries are the nation’s top life sciences markets like Boston, San Francisco, the Bay Area and San Diego.

But others are muscling in. The report cites the $731 million HELIX Health + Life Science Exchange under construction near Rutgers University in New Jersey, and Science Square Labs, a 365,000 SF complex being built in Atlanta by Georgia Tech in partnership with Trammell Crow.

The report notes that markets with the largest share of remote work have seen the highest spike in vacancies. It cites Denver as an example. Some 27.5% of workers in the metro work remotely and vacancy has increased by 3% over the past year to 20.2%. The area has also been hit by layoffs in both the financial and information sectors.

The report predicts continued distress in regions with high levels of remote work. “Nonetheless, well-positioned assets in these markets will continue to perform well, but older and poorly located properties will face more challenges,” it states.