CommercialEdge’s report on how the national office market fared in March 2024 contains little good news for landlords, but it does describe shifting trends that are influencing some locational decisions as well as the risks posed by AI.
The national office vacancy rate rose to 18.2% — up 120 basis points over the prior year. The average national listing rate dropped 1.3% to $37.74, construction plummeted, and properties changed hands at a national average of just $171 per SF.
The report notes that both coworking spaces and flexspace are becoming more suburban. The amount of flexspace – industrial space often used for both warehousing and office – grew in the year from113.5 million SF to 124.8 SF, almost all in suburban submarkets.
Similarly, suburban coworking space grew by nearly nine million SF compared to 400,000 SF in urban areas. “Suburban submarkets now account for nearly as much space as their urban counterparts,” the report noted. “With Manhattan excluded, the suburbs’ share of national coworking space is 52%. Many firms have eschewed traditional office leases and instead are choosing coworking to fulfill this need.” Suburban coworking spaces serve to encourage in-office collaboration, training and deep focus.
The report questions whether these flexspace moves will become permanent features of the office landscape. It noted that city centers enjoy amenities and transportation options suburbs often lack. “We expect that vibrant city centers with mixed real estate uses will attract more coworking tenants in the long run,” it noted.
Meanwhile, offices in tech markets are also suffering higher vacancies. In San Francisco, the vacancy rate grew 510 bps to 24.2%. In the Bay Area it rose 350 bps to 20.8%, in Seattle 390 bps to 22.6%, in Denver 330 bps to 22.7%, and even in Boston – a life sciences hub with strong demand — 290 bps to 12.8%. In a few fortunate metros, vacancy rates declined over 12 months though they remained high. In Austin, vacancy fell 20 bps to 22%, in Chicago 20 bps to 19%, in Tampa 350 bps to 12.7%, in Phoenix 20 bps to 18%, in Atlanta 280 bps to 17%, and in Nashville 190 bps to 15.5%.
There has also been a slowdown in the growth rate of office-using employment – “a blow to a sector striving to recover demand lost to remote and hybrid work.”
In the past two years, office construction shriveled by 40%. The report expects the drought to continue. In 2023, 44.1 million SF of office projects were begun – well below prior levels; in 1Q 2024 office starts nationally totaled just 2.8 million SF.
As for sales, the negative trend continued. The total value of transactions this year was $5.4 billion, of which the Washington, DC area accounted for almost $1 billion. The next closest market was the Bay Area with $404 million in sales. The national average sale price was $171 per SF. San Diego led the nation at $608 per SF, followed by San Francisco at $580.
There were also some interesting deviations: $92 per SF in Chicago and $201 per SF in Nashville—putting Nashville in the top 10 nationally. Oracle’s just announced plan to construct its $1.2 billion global headquarters in Music City to build on its role as a healthcare hub will certainly help.
The uncertain impact of AI hangs like a cloud over the whole picture. The report considers it a threat because some firms intend to supplement existing staff with AI instead of new employees. However, it is expected to increase demand in some areas, since AI firms of all sizes are ramping up to adopt the technology.
Source: “Shifting Office Trends Could Influence Site Selection Decisions“
