Dr. Gleb Tsipursky – The Office Whisperer
Nirit Cohen – WorkFutures
Angela Howard – Culture Expert
Drew Jones – Design & Innovation
Jonathan Price – CRE & Flex Expert
The U.S. office market remained under significant pressure with a national vacancy rate of 19.4% in May, up 160 basis points from a year ago, according to a new report from Commercial Cafe.Â
Despite a 4.8% annual rise in average asking rents to $33.15 per square foot, tenant demand continues to lag during sluggish office-using employment growth and evolving workplace trends.
Vacancy & Rents
San Francisco led the nation with a 28.4% vacancy rate in May, followed by Austin at 26.7% and the Bay Area at 25%. Western and Southern markets, including Los Angeles, San Diego, Dallas, and Houston, also posted vacancy rates above the national average. In contrast, the Twin Cities remained the most stable major market with 17.2% vacancy.
Office listing rates varied significantly across metros. Manhattan remained the priciest market at $68.08/sq. ft., followed by San Francisco ($63.01) and Miami ($57.71). Meanwhile, Detroit and the Twin Cities offered the most affordable rents at $21.60 and $26.60, respectively.
Conversions on the Rise
With record vacancies, office-to-residential conversions gained traction. More than 149 million square feet have been proposed for conversion nationally, 48 million of which were announced in 2024 alone. Manhattan and San Francisco are leading in both proposed square footage and conversion feasibility, with programs like NYC’s Office Conversion Accelerator and San Francisco’s Adaptive Reuse Program providing incentives.
Notable projects include the 222 Broadway conversion in Manhattan, which will create 798 apartments by 2027, and the New Humboldt Residences in San Francisco.
Construction Slows Sharply
Office construction is declining across the country. Just 41.5 million square feet were under construction in May, down substantially as new starts lag completions. Boston leads in development, largely driven by the life sciences sector, with 5.86 million square feet underway. However, funding cutbacks have cooled activity, with only one major new project breaking ground this year.
Southern cities like Dallas and Austin remain development hotbeds, with 3.2 million and 2.7 million square feet in progress, respectively.
Sales Volumes & Prices
Year-to-date, $19.6 billion in office sales have been recorded nationwide, with an average price of $194 per square foot. Manhattan remains the top investment market with $2.8 billion in sales.Â
However, average prices in cities like Los Angeles and Austin have fallen over 30% from 2022 peaks.
Los Angeles led the West in total office sales at $1.08 billion, although buildings traded at an average of $281/sq. ft., well below development costs in some cases. The Bay Area followed with $2.09 billion in deals, surpassing San Francisco and recording the second-highest price per square foot in the West at $356.
In the Midwest, Chicago topped sales volume at $794 million, despite the lowest pricing among major U.S. cities at just $59/sq. ft. The Twin Cities were also notable for stability, with rising investment and below-average vacancy.
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Employment Outlook
Job growth in office-using sectors has stagnated nationally, increasing by just 1,000 jobs year-over-year. In May alone, the sector shed 3,000 jobs, primarily in Professional and Business Services. Charlotte stands out as a rare bright spot, with a 2.96% annual growth in office-using employment, driven by corporate relocations.
Regional Highlights
- Northeast: Manhattan, Boston, and New Jersey are seeing declining construction activity but remain high in sales volume and pricing. Philadelphia is among the most affordable markets with low development and modest demand.
- South: Miami and Austin remain high-rent hubs, with strong development in Texas. Houston and Dallas face high vacancy and low sale prices.
- Midwest: Markets like Chicago and Detroit remain affordable but show diverging fortunes; Chicago sees growing investor interest, while Detroit struggles with high vacancy.
- West: Vacancy surges in the Bay Area and Portland, but SoCal (Los Angeles and San Diego) leads in new construction. San Francisco and Seattle continue to face low sale prices and limited investment.
Outlook
With muted demand, a growing shift toward conversions, and shrinking construction pipelines, the U.S. office sector remains in a period of correction. Cities embracing flexibility and incentivizing repurposing stand the best chance of revitalizing their downtown cores as the office market resets.
