Office occupancy is unlikely to increase in the near future, and record office vacancies are creating an opportunity for building owners to convert office space to housing. More than 149 million square feet of office space is being considered for conversion, according to CommercialCafe’s latest national office report.
Although it has one of the highest office occupancy rates in the nation, Manhattan is a prime market for conversion proposals. The city has more than 23 million square feet of office space proposed for conversion, a trend that is bolstered by municipal programs that assist with conversion-related zoning and permitting. Meanwhile, in San Francisco, which has one of the nation’s highest vacancy rates at 28.4% and office attendance below 50%, only 1 million square feet of proposed conversions are being considered.
Vacancy across the national office sector rose 160 basis points to 19.4% in May on a year over year basis, but down 30 bps from April, the report said. Western markets continued to see high office vacancy rates while Southern markets followed mixed trends in May. Tampa, for example, continued to see high occupancy levels, finishing the month with a 16.5% vacancy rate despite a 340 bps year-over-year increase. At the other end of the spectrum, Austin recorded the second-highest vacancy rate in the nation at 26.7% after a 340 bps annual increase.
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The average office listing rate was $33.15 per square foot in May, a 4.8% year-over-year increase. Manhattan retained its position as the nation’s most expensive office market, with asking rents averaging $68.08 per square foot, despite a 4.5% annual decline. Boston and New Jersey also experienced softening asking rents, with year-over-year decreases of 1.4% and 2.4%, respectively. Meanwhile, Philadelphia was one of the most affordable major office markets in the U.S., with asking rents at $31.17 per square foot, staying flat year-over-year, said the report.
The office construction pipeline continued to shrink, with 41.5 million square feet of office space currently under construction. During the first five months of this year, 11.3 million square feet of office space were completed, but only 4.2 million square feet broke ground, said CommercialCafe.
Boston’s office supply pipeline leads the nation, driven by the life science sector, which represents three-quarters of the market’s pipeline. The life sciences sector, however, has faced headwinds this year, with private capital funding pulling back and cuts to NIH funding reducing demand for lab space.
Across the U.S., a total of $19.6 billion in office sales was recorded through May, with properties trading at an average of $194 per square foot. Office sales in Los Angeles exceeded $1 billion through May, although the average sale price declined by more than 30% from 2022. Chicago was the top investment market in the Midwest, with $794 million in office sales to date this year despite having the lowest average sale price among major U.S. markets at $59 per square foot.
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
