According to new data by CommerialEdge, wider economic shifts fueled by multiple interest rate hikes, the growing prevalence of work from home and the increasing office footprint reductions by companies continued to pressure the U.S. office sector throughout the first half of 2023.
The national U.S. office vacancy rate reached 17.1%, rising 180 basis points over year-ago figures. At the same time, rent growth remained patchy across the country, with listing rates falling even in some of the priciest markets, such as Manhattan (down 2.8% year-over-year) and the Bay Area (down 5.57%).
Halfway through 2023, office sales totaled $14.8 billion, significantly below the $43.7 billion recorded during the same period in 2022. Overall, markets with a larger life science supply, such as Boston and New Jersey, remained attractive to investors. Besides life sciences, medical office buildings are also expected to stay a favorable property type for investors, our office market outlook shows.
The national average full-service equivalent listing in June was $37.82, an increase of 0.6% over the last year, according to the latest U.S. office market report. The average rates for A and A+ office spaces have decreased by 1.4% from last year, currently standing at $45.41 per square foot. Class B office rates have inched up by 0.3%, to $30.37 per square foot, and Class C properties also saw a slight increase of 0.3%, to $23.04 year-over-year in June.
Rents for suburban properties have increased the most, going up by 3.3% to $30.76 per square foot compared to the previous year. On the other hand, CBD office spaces have seen a decrease of 1.7% to $49.02 per square foot, while urban office spaces have gone down by 1.4% to $44.80 per square foot year-over-year in June.
While the national office vacancy rate stood at 17.1%, more than half of the top 25 markets recorded vacancies above the national average. Vacancy rates in Denver have increased 310 basis points in the last 12 months and currently sit at 20.1%, one of the highest figures among the top 25 markets. Denver also has one of the highest rates of remote work, according to data from the Census Bureau's American Community Survey.
Recently, the city government has joined other cities in paying an outside consulting firm to study the feasibility of converting largely vacant towers in the CBD into housing. In the metro's CBD, the vacancy rate stood at 31.7%, more than double compared to more in-demand submarkets such as Lower Downtown and Cherry Creek.
Nationally, 115.8 million square feet of office stock was under construction at the end of the second quarter of the year, accounting for 1.7% of the existing stock. Nonetheless, the under-construction pipeline continued to shrink steadily this year as projects are delivering faster than new ones are starting.
CommercialEdge reports only 15.7 million square feet of office space has started through the first two quarters, half of what had started during the same period last year. What is more, nearly two-thirds of all starts in 2023 have been in just 10 markets, primarily in those located in the Sunbelt or life science hubs.
Construction of more than 1.5 million square feet started in Austin this year, the most of any market in the country. Much of that is due to The Republic, a 48-story tower with more than 800,000 square feet of office space along 4th St. While the market has added office jobs at a faster rate than any other market in the country and has the highest office utilization in Kastle's Back to Work Barometer, there are still risks of oversupply, especially as the vacancy rate continues to rise.