REAL ESTATE NEWS

Is it the best of times and the worst for the San Francisco office market? In October it became the most expensive market in the U.S. – but also the one with the highest vacancy rates.

How is this possible at the same time? According to CommercialEdge’s November 2024 office market report, the average office rent in San Francisco was $69.14 per square foot– beating out the Manhattan average of $68.48. However, it found most of the increase within the San Francisco metro area is the result of high rates in suburban areas like Sand Hill Road, where the asking rent for Sand Hill Commons in Menlo Park was $204 per square foot in October.

At the same time, the vacancy rate in the metro rose 360 bps year-over-year to 27.7%, the highest in the nation, while Bay Area vacancy followed at 26.4% after an increase of 630 basis points and asking rents averaged $54.20 per square foot.

San Francisco was not alone in experiencing a spike in vacancy rates. Other tech markets did so too, with a wave of tech layoffs in recent years contributing to the problem. Weakness in the life sciences sector was another factor. Between 2021 and 2023, San Francisco saw 6.4 million square feet of lab space break ground. It now accounts for 25% of the metro’s vacancy rate, and construction is down sharply. “It will likely take years for the existing stock to be absorbed,” the report commented.

The metro also has 3.78 million square feet under construction – down from 4.7 million square feet in September – but enough to make it the second most active construction market in the U.S. after Boston.

On the other hand, San Francisco also led the nation in October sales prices, trading at an average of $392 per square foot, up $53 from September, to score deals worth $722 million. Los Angeles came in third with an average price of $369 per square foot for a total of $983 million. The market was dominated by a $920 per square foot, $185 million deal for 2220 Colorado Ave. in Santa Monica. “The sale shows that the right asset can still attract investors,” the report noted. Another major deal in Los Angeles was the $187.5 million sale of The Bluffs campus in Playa Vista for $187.5 million, well below the previous owner’s $413 million purchase price.

Taking a broader look at the U.S. as a whole, the report found that the national average listing rate was $32.79 per square foot, up 3.3% from the year before, while total vacancy stood at 19.4%, up 160 bps. Outside San Francisco, the highest average square foot rates were recorded in Boston ($53.35), Miami ($52.84), Austin ($46.75) and Washington, DC ($41.41).

Nationally, the under-construction pipeline has shrunk with 60.8 million square feet under construction, representing 0.9% of stock. The report blamed the slowdown in construction starts primarily on the slump in life sciences.

Through the end of October, $29.2 billion in office sales were recorded nationally, for an average of $177 per square foot. By volume, year-to-date, Manhattan led with $3.28 billion, followed by Washington, DC ($2,480 billion), the Bay Area ($2,114), Los Angeles ($1,755) and Dallas ($1,141).

Looking regionally, the Midwest continued to record some of the weakest fundamentals in the nation at the end of the third quarter, as well as the most affordable office markets. The lowest asking rents nationally at $26.13 per square foot were offered in Detroit, which also had the nation’s highest rate of office vacancies at 22.5% and which the report considered in the most significant distress. Rents in the Twin Cities averaged $26.13 per square foot and $27.23 per square foot in Chicago. Chicago recorded the region’s highest sales volume at $858 million, though at a below-national average of $100 per square foot.

Office investments in the South performed better. Washington, DC ranked second nationally in sales volume, and Dallas-Fort Worth ranked fifth nationally with deals totaling $1.1 billion through October. Atlanta saw $1 billion in sales by October, compared to just $589 million for the whole of 2023, but at prices below the national average. Asking rents in Atlanta came in at $33.34 per square foot. Miami saw asking rents averaging $52.84 per square foot, with sales at $369 per square foot for a total of $983 million.

In contrast, sales in Austin plunged from $379 per square foot in September to $287 in October. “The drop reflects an increase in properties being sold at discounted prices,” the report said. The metro remained the leader in office development, with 3.5 million square foot underway. That boosted vacancy to 27.7% — a 710 bps rise year-over-year and the highest among major markets. Asking rent, however, remained high at $46.75 per square foot.

In the Northeast, Manhattan was the only metro not to see a spike in vacancies. Asking rents rose 3.2% year-over-year to an average of $68.48. The city also achieved the highest sales volume in the nation with $3.3 billion in deals through October — nearly double the $1.7 billion sold in the same period in 2023 and placing it fourth in sales volume nationally.

The Northeast’s highest vacancy rate (20.1%) was recorded in New Jersey, an increase of 260 bps year-over-year, followed by Philadelphia (18.9%), up 510 bps. Both markets were also among those with the lowest sales prices in the U.S.

Boston’s 16.8% vacancy rate was low by national standards, but higher by 650 bps compared to the prior year. The metro, however, remained the leader in office development with 10.7 million SF underway, or 4.3% of its existing stock, largely due to 8.6 million SF of life sciences projects. With rents averaging $53.35 per square foot, Boston remained a high-cost market. It achieved $1.1 billion in sales through October, but prices per square foot plunged from $313 to $187 compared to 2023.

September data showed that the Sunbelt experienced the greatest growth in office-using jobs among major markets, especially Houston, Dallas, Miami, Phoenix, and Charlotte. However, some markets like Atlanta and Nashville saw decreases.

One sector unquestionably benefiting despite the turmoil in office markets is coworking spaces, which continue to grow. The number nationwide rose 7% in the third quarter to 7,538. They occupied 133.5 million square feet – up five million in the quarter.

The highest number of coworking spaces were located in Los Angeles, followed by Dallas-Fort Worth, Manhattan, Washington, DC and Chicago. There was little change in national average prices. Dedicated desks remained at $300 a month, while open workspaces ($150 a month) and virtual offices ($120 a month) rose slightly.

As the total amount of coworking space has risen, the average size of a coworking location has diminished. “As smaller, community-focused coworking spaces increasingly replace the centrally located large, multi-floor flex spaces that were more common before the pandemic, we expect this trend to continue,” the report noted.

Source: GlobeSt/ALM