The rapid spread of the COVID-19 delta variant is posing yet another challenge to businesses rolling out their return-to-office plans. However, this time, employers have been able to respond and adapt in a timely manner, with the likes of Alphabet and Walmart adjusting their initial schedules. Plus, several companies are also considering mandating vaccines for employees who wish to return to their offices, including the likes of United Airlines, Facebook, Northwestern Mutual and Tyson Foods.
Meanwhile, on the landlord side, there has been a concerted effort to attract new tenants by offering concessions and amenities — rather than lowering rates — and whether that trend continues will depend greatly on the disruptive potential of the delta variant on the current office market.
Average U.S. Office Asking Rent Closes at $38.60, Following 1.2% Y-o-Y Rise
As far as the negative effect of the pandemic on office vacancy rates, the worst seems to be over — the national rate rested at 15.5% last month. And, although that’s still below the pre-lockdown vacancy rate of 12.8% in February 2020, the market has been reassuringly stable for the past four months, with only minor monthly fluctuations.
At the national level, July asking rents increased by 1.2% year-over-year (Y-o-Y) to reach $38.60 per square foot. Zooming in on individual markets, Los Angeles witnessed the highest yearly increase in asking office rents: Asking prices for office space in Los Angeles reached $41.60 per square foot, following an 8.1% hike since July 2020. Similarly, Bay Area and Tampa listing rates shared the second spot for rent growth, as they both shot up by 6.2%. Specifically, average rental rates in the Bay Area hovered around $55.80 per square foot in June, while Tampa values finished at $29.70 per square foot. Finally, among the top 25 markets, Seattle and San Francisco saw significant rises in vacancies, recording increases of 190 basis points and 170 basis points, respectively.
34.4 Million Square Feet of New Office Space Completed in First Half of 2021
Nationally, 34.4 million square feet of new office space was added to the inventory throughout the first half of the year. In terms of projects under construction, the numbers shrank by 4.5% since the start of 2021, totaling 157.2 million square feet as of July. Granted, because the timeline for completing an office project can take up to two or three years, any significant changes in the pipeline will only become visible once the stock of developments that began before the pandemic has been depleted.
At a local level, Manhattan has some 20.6 million square feet of new office space currently under construction — a 4.3% increase year-over-year — followed by Boston, with 12.3 million square feet. Not to be outdone, Austin witnessed the highest growth in its office pipeline — a 10.5% jump compared to last year — to give the Texas city the third position in terms of ongoing development projects, with 9 million square feet of office space.
Office Prices Rise in Urban Submarkets; CBD Assets Struggle
While office sales activity has remained below pre-pandemic levels, transactions recorded through July of this year totaled roughly $37 billion. Likewise, investment activity also remains below pre-pandemic levels and, if the current pace of completed transactions holds steady, 2021 office sales could even exceed the $62 billion recorded last year.
Notably, office sale prices for assets located within central business districts (CBDs) took a major hit this year. For example, coming off a $400 per square foot peak in 2019, they averaged $379 per square foot in 2020 — only to slip further in 2021 to $284 per square foot. However, at the same time, the urban and suburban segments of the office market have enjoyed a measure of success during the crisis, with sale prices increasing from an average of $399 per square foot in 2019 to $511 this year.
Download the full August 2021 report for more details on the top U.S. office markets, as well as insights on industry trends and the economic recovery.
Data aggregated for the monthly CommercialEdge national office report refers exclusively to office properties that have at least 50,000 square feet.
Vacancy rates are based on the total number of vacant square feet in a market (including subleases), divided by the total number of square feet of office space in that market. The report excluded owner-occupied buildings.
Sales volume and price-per-square-foot calculations do not always include portfolio transactions or those with unpublished dollar values. For more details on the methodology, visit CommercialEdge and download the full report.