Average National Office Lease Rates Up 0.4 Percent and Vacancy Stays at 15.6 Percent

Photo: CommercialEdge

BOSTON– Average national office lease rates across the United States was up 0.4 percent year-to-date and the vacancy hovered at 15.6 percent, according to a report from CommercialEdge National Office Report.

The report said that Investors still channeling office sales activity mostly toward high-quality assets and growth is expected to pick up.

Here are other highlights from the report:

Across the top 50 U.S. markets, asking office rents averaged $38.36 per square foot in May. This was an uptick compared to previous months, as well as a continuation of the upward trend seen throughout the past year. Specifically, average full-service equivalent listing rates in May were 0.4% higher year-over-year (Y-o-Y). And, despite minutely incremental growth, rents have steadily increased amidst pandemic-related challenges that affected commercial real estate nationwide. Furthermore, as our most recent report indicates, the pace of growth — driven by the overall high quality of stock that is currently on the market — is likely to pick up.

Looking at individual markets, Los Angeles office space saw the largest increase in average full-service equivalent listing rates. Here, it rested at $41.04 per square foot last month — a 7% markup compared to May 2020. Next, three markets shared the second-best spot in terms of year-over-year rent growth. Specifically, average asking rents were up 5% compared to May of last year for office space in the Bay Area ($55.40 per square foot in May), Boston ($35.13 per square foot) and New Jersey ($33.32 per square foot). Not far behind, the third-highest increase in rents last month was recorded in Philadelphia, where lease rates rested at $29.88 per square foot, up 4.9% Y-o-Y.

Average Vacancy Rate at 15.6% Across Major U.S. Office Markets

Office vacancy saw a year-over-year increase of 240 basis points and averaged 15.6% across the markets surveyed for this most recent report. At the same time, our analysis of the national office sector in May found that the generous amount of high-value office space entering, as well as reentering, the market has contributed to the sustained growth of lease rates throughout the past 12 months. What’s more, current trends are expected to continue as more new office space comes to market and the lease landscape continues to shift to accommodate changing work structures and workforce strategies.

Investor Capital Remains Laser-Focused in High-Quality Asset Acquisition Strategies

Meanwhile, sales data analyzed for this report showed that capital continued to move despite generally cautious approaches from both buyers and sellers. In fact, investor interest in office properties across the top 50 U.S. markets has not waned, but rather remains rather more focused on specific high-quality assets. This is in contrast to pre-pandemic acquisition strategies that had more of a wider net of interest in markets as a whole. As such, transactions closed during the first five months of the year totaled $22.5 billion, which puts 2021 investment activity roughly on track with the total office sales volume recorded last year.

Notably, medical office space — as well as lab and life science sector-compatible office properties — have been significant drivers of investment. Moreover, office assets located in central business districts and other urban core submarkets continued to attract the most interest and have maintained their average sale prices at record-high levels during the first months of this year. Consequently, the sale price for urban office property averaged $429 per square foot — a 4.5% increase compared to the previous year.

New Construction Continues at Rapid Pace, Urban Submarkets Hold Majority of New Stock in Pipeline

On track with pre-pandemic capital trends, as well as current investment tendencies, most of the new office property under construction is located in urban cores, with only 29% of stock being developed in suburban submarkets. And, since the beginning of the year, developers have completed more than 20 million of the 80 million total square feet of new office space that is forecasted by year-end across the markets we surveyed. Nearly 161 million square feet remains under construction.

In terms of the largest pipelines among the markets we tracked for this report, Manhattan and Boston stood out by far with 19.3 and 13.3 million square feet, respectively, currently under construction. In third and fourth place were the western U.S. markets of Los Angeles (8.8 million square feet under construction) and San Francisco (8 million square feet).

Remarkably, Austin came in fifth with a pipeline currently at 7.6 million square feet under construction, which accounts for 10% of stock. Including new office supply in the planning stages, Austin is looking at 28% of its stock currently under development — the largest pipeline in the country on a percent-of-stock basis.

For more insights and market-specific data, check out our full report here: https://www.commercialedge.com/blog/national-office-report-2021-june/