Office properties in central business districts (CBD) continue to face headwinds that have pushed vacancy to 19.2%, according to Yardi Matrix’s national office report for May. That is up 730 basis points from early 2020, and while it is a lower rate than in both urban and suburban submarkets, CBD listing rates have taken a significant hit as a result of decreasing demand.
Full-service equivalent listing rates for CBD spaces average $38, nearly 30% less than they were before the pandemic, while urban rates have fallen 20.7% and suburban rates stayed positive with a 6.5% increase.
The CBD office market faces further challenges due to newly signed executive orders that reverse previous directives prioritizing these areas for federal office site selection to allow agencies to select the most cost-effective facilities possible, according to Yardi. Other sectors are also shifting away from CBDs, resulting in diminishing deliveries. New office inventory in these districts fell 42% year-over-year to just under 4 million square feet last year, the lowest level since 2016, said Yardi Matrix.
Overall, 44.6 million square feet of office space is under construction, representing 0.7% of stock, and only 2.8 million square feet of starts were recorded during the first four months of the year.
“The sector is still in the early innings of prolonged realignment, and we expect development to remain depressed for the foreseeable future,” said the report.
Yardi Matrix recorded $14.2 billion in sales through April, with properties trading for an average of $191 per square foot. The report pointed to the sale of a 30-story, 910,000-square-foot building in Chicago’s CBD that sold for $63 million, a 65% discount from its $182 price tag in 2018.
“Although we expect a continuation of steep discounts for some CBD properties, others have been able to maintain occupancy and adequate cash flow throughout the challenges created by COVID,” Yardi explained. “The right property in the right location can continue to thrive in the current environment.”
A trend of weak employment growth in office-using sectors is expected to persist this year, and tech layoffs that began in late 2022 continue to drag down some markets, according to the CRE research firm.
Despite having a relatively low vacancy rate at 17.1%, Boston has experienced some of the biggest increases in vacancy during the past year, jumping 470 basis points. Yardi said this is largely due to challenges in the life sciences sector, which has faced a pullback in private capital and market oversupply. Further challenges are ahead in Boston as cuts to National Institutes of Health funding could dampen demand for new lab space, said the report.
Meanwhile, Austin’s days as an office development boomtown may be numbered, according to Yardi. The market has completed 14 million square feet of new office space since 2020, with 8.8 million square feet being started in Austin between 2020 and 2022, but just 1.3 million square feet begun construction since the start of 2023.
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