The State of the U.S. Office Market (June 2022)
Throughout the pandemic, the world of work has been shaken, and the effects of this turmoil are still clearly being felt today. Notably, the office sector continues to struggle, making its future difficult to predict.
In their recent U.S. National Office Report, covering June data, Commercial Edge has found that vacancy rates remain high in the country. Meanwhile, fluctuating interest rates and an increase in hybrid and remote working practices have caused a significant shift in sales volumes and new construction breaking ground. Here are the key findings detailed in the report:
Average Office Listing Rate Drops
Nationwide, the average office listing rate stood at $37.58 per square foot in June. While this shows a month-over-month increase of two cents, the rate dropped by 2.6% year-over-year. Even so, some markets have recorded remarkable increases compared to twelve months ago.
Charlotte is the most notable example, with a 15.6% rise from last year, bringing the listing rate up to $33.45 per square foot. This follows four months of continuous increases. Boston has also seen a 12% year-over-year gain, a direct result of the city’s investment in the life science sector. And not far behind, Miami witnessed a boost in its office listing rate of 8.4%, taking the price per square foot up to $47.23.
Office Vacancy Rate Plateaus
The national office vacancy rate stood at 15.2% in June, increasing by 20 basis points on a year-over-year basis. There is some good news, though — month-over-month, the rate dropped by 20 basis points.
Indeed, several markets have seen vacancy rates fall. However, out of the 50 major cities studied, only Boston could boast an office vacancy level of less than 10%. After a whopping 180 basis point drop year-over-year, the city had a vacancy rate of 9.6%. But other areas have seen sharper declines, such as Phoenix, where the vacancy rate shrunk by 240 basis points year-over-year. Miami also recorded a significant drop of 200 basis points, while the Twin Cities saw a 190 basis point reduction relative to a year ago.
All in all, the office markets with lower vacancy rates tend to be concentrated in the Sunbelt and the areas focusing on the life sciences sector.
Commercial to Residential Conversions Struggle
With so much office space sitting empty, one trend predicted to take off was converting commercial space to much-needed residential space. However, two years on and very little progress has actually been made in this respect. Indeed, the process has proven to be far more complex than initially anticipated.
The main issue is that it’s simply not profitable in most cases due to logistical problems. Challenges such as transforming large floor plates into a reasonable number of apartments — each enjoying natural light — limit the total number of residential units that could be built in the space.
As such, office to residential conversions have become a rather niche sector. Instead of helping to reduce the issue of low housing availability as was hoped, projects that are going ahead — such as the iconic conversion of 1 Wall Street into 566 condos — are aimed at the luxury living end of the spectrum.
Shift in National Office Sales Volume
The national sales volume for the first half of 2022 was $43.7 billion. This figure was lifted by strong sales throughout June, which brought in an extra $8.4 billion. However, only 32% of these sales were recorded in traditional gateway markets such as NYC, Chicago and LA, a significant drop from five years ago when these cities recorded 41.5% of the total national sales.
This hints at an ongoing trend in which investors have started to move away from traditional office hubs in favor of non-gateway tech and life science centers. Denver, the Bay Area and Seattle are good examples, all of which have recorded office sales of more than $2 billion this year.
Office Construction Continues in Life Science Hubs
So far, 2022 has seen 26.5 million square feet of new office projects breaking ground, bringing the national total to 151.7 million. Again, many new builds are focused in life science hubs such as the Bay Area (2.3 million sq. ft.) and Boston (1.6 million sq. ft.).
But it was Dallas, TX, that saw the most shovels strike ground, with 3.8 million square feet of new office space now underway. Close behind, Austin boasts 2.7 million square feet, while Charlotte is also in the running, with 2 million square feet.
Interested in the office or shared spaces market in the areas mentioned in this study? Check out the links below:
Office space for rent in Los Angeles
Coworking in Los Angeles
Office space for rent in Denver
Coworking in Denver
Office space for rent in Seattle
Coworking in Seattle
Office space for rent in Dallas
Coworking in Dallas
Office space for rent in Austin