Office up? Down? For the last few years, it’s been some of both. But there have been signs of the property type hitting bottom.
And now the other expected shoe is dropping. Yardi Matrix’s National Office Report said that office market distress is finally rising. For years, investors have been waiting for values to fall enough to provide massive discounts that can eventually turn into big returns on investment.
In 2024, distressed transactions started to take off, with 25 million square feet bought and sold. That was 39% over the previous three-year average of 18 million square feet. The total number of transactions last year was just below 2,400, with the distressed portion jumping to 10.8%. The average property size for distressed office properties is more than 200,000 square feet, up 30% over 2023. Central business district distressed transactions were triple those of 2023 and double those of urban properties. Suburban transactions leveled off, but were half of all the distressed deals.
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Chicago led distressed transactions last year with 26, more than double the number in 2023. One example was the 882,071-square-foot Schaumburg Towers complex in a suburb. Sigma Plastics Group bought it for $74 million, although the price was only a 15% discount compared to the previous sale. So, hopes for deeply discounted prices might leave some disappointed.
However, there weren’t any geographic patterns among the 26 distressed sales. No two took place in the same city.
The full-service equivalent listing rate was $33.42 per square foot in March. Yardi Matrix said that it was up one cent over February and 4.9% year-over-year. The national vacancy rate was 19.9%, flat month-over-month but up 170 basis points year-over-year.
Metros with a heavy high-tech presence tend to have the highest vacancies. They included Austin (28.5%), the Bay Area (25.5%), Denver (25.2%), San Francisco (28.6%), and Seattle (27.5%). Because the companies more easily used remote and hybrid working structures than other industries, they had an easier time reducing lease footprints. Making the trend even stronger, there were major layoffs in 2022 and 2023, as many companies focused more strongly on the new generative forms of artificial intelligence.
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