Office sales, construction plummet as market adjusts to new work trends

The US office market continued to face headwinds in the first quarter, marked by rising vacancy rates across the nation and a sharp slowdown in new development activity, according to a new report by CommercialEdge.

The national office vacancy rate reached 18.2% in March, up 120 basis points year-over-year, as companies embrace remote work models and reevaluate their real estate footprints. The increases are widespread, impacting markets and sectors across the board.

“Coworking operators are bringing the office to the worker rather than waiting for the worker to commute to them by adding significant space closer to where people live in the suburbs,” said Peter Kolaczynski, director at CommercialEdge.

Suburban submarkets now account for 47% of national flex office space, up three percentage points over the past year.

Tech hubs have been among the hardest hit, with vacancy rates in San Francisco surging 510 basis points, the Bay Area up 350 basis points, and Seattle rising 390 basis points over the last 12 months. Finance centers like Dallas (up 510 bps) and Charlotte (310 bps) have also seen substantial increases. Even Boston's in-demand life sciences market logged a 290 basis point vacancy jump.

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Meanwhile, new office construction has slammed the brakes nationwide. Only 87.9 million square feet were under construction as of March, just 1.3% of existing stock and nearly 40% below the pipeline two years ago. After averaging 64 million square feet annually from 2020-2022, office starts plunged to 44.1 million square feet last year and just 2.8 million through Q1 2024 amid falling demand, rising costs, and tighter lending standards

“The office stock currently under construction is vastly concentrated in the largest markets,” the report stated, with Boston alone accounting for over 15% and the top 10 markets comprising 56% of the national pipeline.

Office investment sales have also cooled, totaling $5.4 billion year-to-date through March - down 17% from the same period in 2023 and 70% below full-year 2022 levels. Properties traded at an average $171 per square foot.

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