Office Market Distress Persists Amid Rising Defaults and Maturing Loans 

Key Takeaways: 

• The average U.S. listing rate stood at $31.67 per square foot in June 
• Up 100 basis points year-over-year, the national office vacancy rate was 18.1% 
• Under-construction office space totaled 76.9 billion square feet nationwide, equal to 1.1% of total stock 
• Office sales amounted to $13.7 billion during the first half of 2024, with assets trading at an average $172 per square foot 
• San Francisco was the second most expensive office market nationally in terms of asking rents, with an average of $60.99 per square foot 
• Detroit posted the lowest rental rate among leading U.S. office markets at $22.00 per square foot 
• Austin led the South in office development on a percentage-of-stock basis, with underway projects accounting for 4.6% of stock 
• Manhattan recorded the largest sales volume nationwide, with investors closing $1.4 billion worth of deals during the first half of the year 

Trends & Industry News

Loans Maturing Into Rocky Environment 

Office utilization has plateaued, values have fallen, and interest rates remain elevated for new loans and refinancing. Office defaults and delinquencies are on the rise in 2024, and hundreds of billions in office loans are set to mature over the next few years, data in our U.S. office market report shows. 

More than $260 billion of office loans have recently matured or are maturing by the end of 2026, according to our data. This represents 30% of all office loans, covering over 12,000 properties. However, the risk posed by maturing loans is not distributed equally across markets. Among top markets, Atlanta has the highest concentration of maturing loans, with 48.3% of its office loan volume either having recently matured or due to mature through the end of 2026. Atlanta is followed by Denver (41.8%), Nashville (41.7%), Chicago (40.7%) and the Twin Cities (39.2%), making them the only top markets crossing a 35% threshold.  

Maturing loans are concentrated in top-rated properties and city centers. Although a flight-to-quality among tenants has been a boon to a smattering of trophy buildings, the majority continue to struggle. Of the maturing office loans, $164.5 billion (62.6%) are in urban submarkets, and $187.7 billion (71.4%) are class A buildings. 

Class A and urban assets continue to hold an overweighted portion of the looming debt burden. Properties at the lower end of the Class A designation, where vacancy is also the highest, are going to be the most at risk.

Peter Kolaczynski, Director, CommercialEdge

The billions of maturities on the horizon form a precarious path forward for offices, with delinquencies already on the rise in the sector. According to Trepp, $1.87 billion of office loans were newly delinquent in June, pushing the sector’s delinquency rate to 7.5%. This marks an increase from 4.5% last June and 5.8% at the end of 2023. While lenders and investors have mostly accommodated owners dealing with significant vacancies, the “extend and pretend” practice can only continue for so long, and lender losses are inevitable. 

Discount purchases have been increasing in 2024, and office real estate outlooks anticipate this trend will only continue to rise in the upcoming quarters. Given that most lenders aim to decrease their exposure to office and debt costs remain high, we also expect an increase in all-cash sales. Bargain shoppers will be able to bounce quickly, provided that they can offer cash upfront. However, owners with a strong track record and solid lender relationships will still be able to obtain financing for discounted properties. 

Listing Rates and Vacancy

Updating National Rents Calculation

The national average full-service equivalent listing rate was $31.67 per square foot in June, our latest U.S. office market report reveals. 

Starting this month, we are changing the way we report the national average full-service equivalent listing rate.

Previously, the national calculation only included the top 50 markets, but starting with this report, it will encompass all 120 markets. Consequently, national figures in this and future reports will not be directly comparable to those from June 2024 and earlier.  

This change was made to provide a more comprehensive picture of the national office market. Previously, using only the top 50 markets caused the national rate to skew higher than an average that included all markets because the largest markets also have the highest full-service listing rates. 

Top Listings by Metro Area: June 2024 

The national vacancy rate was 18.1%, an increase of 100 basis points year-over-year. U.S. office vacancy rates have been rising in most of the top 25 markets. The most significant growth was registered in San Francisco and Dallas (430 basis points increase over the last 12 months), followed by Los Angeles (350 basis points), and Seattle and Austin (310 basis points). Other notable examples include Charlotte (300 basis points increase year-over-year), the Bay Area (260 basis points) and San Diego (240 basis points). 

Supply

Life Science Development Boom Wanes 

Nationally, 76.9 million square feet of office space were under construction as of June, representing 1.1% of stock. The construction pipeline for office spaces has shrunk substantially this year, with new starts well below a replenishment level. 

Through June, 23.5 million square feet of office stock has been delivered, while only 6.9 million square feet broke ground. Demand for office space is unlikely to ever fully return to pre-pandemic levels, office real estate outlooks suggest. Banks have become increasingly unwilling to provide loans for new office constructions, and rising interest rates have made the available construction loans much more expensive. Developers have all but abandoned the office sector in 2024. 

Office Space Completed vs Forecasted (Million Sq. Ft.) 

Following three years of development frenzy, the life science sector is returning to normal. In 2021, life sciences constituted roughly 20% of all office starts, while in 2022 and 2023, it accounted for over a quarter of all office space that broke ground. In 2024, however, the sector has returned to a level within its historical averages, accounting for just 9.0% of the square footage started this year. 

Transactions

Chipmaker Purchase Sparks Growth in the Bay Area 

Across the U.S., a total of $13.7 billion in transactions have been logged during the first half of 2024, with properties trading at an average of $172 per square foot, according to our latest U.S. office market report. 

2024 Year-to-Date Sales (Millions) 

Amid the slowdown in the tech sector, the Bay Area has remained one of the most active markets for office investment, with $1 billion in sales so far in 2024. Chipmaker Nvidia has more than doubled its market cap in 2024, thanks to the surge of AI investment. The company has used some of this windfall to purchase its headquarters in Santa Clara for $374 million, which includes office labs, data centers and future development rights. 

Western Markets

San Francisco Remains the Most Expensive Rental Market in the West 

The Bay Area logged the largest sales volume in the region, with investors closing over $1 billion in deals. On a national scale, only Manhattan and Washington, D.C., surpassed this volume, with deals totaling $1.4 billion and $1.3 billion, respectively.  

During the second quarter, a significant deal in the Bay Area was chipmaker Nvidia’s 550,000 square-foot-campus acquisition for $374 million. The seller, Preylock Holdings, had bought the campus in 2017 for $240 million. The 2024 purchase comes with 2 million square feet of future development rights , enabling Nvidia to potentially expand its headquarters.  

Los Angeles, the leader in office transactions throughout 2023, ranked fifth among the top metros in the West, with deals amounting to $287 million year-to-date. Despite the decreasing sales volume, Los Angeles maintained the highest sale prices in the region, with properties trading at an average of $362 per square foot. San Francisco followed with $324 per square foot and San Diego with $274 per square foot.  

West Regional Highlights 

San Francisco’s leasing activity experienced an uptick during the second quarter, fueled mainly by AI companies, which were responsible for 25% of all leases, subleases and renewals in the metro, as highlighted by Bisnow. This marks the quarter as the second-best for leasing in the past two years. Notably, Scale AI closed the quarter’s largest deal by subleasing 178,000 square feet of space from Airbnb at 650 Townsend St., three times the size of its current downtown office.  

San Francisco remained the most expensive market in the West, with average asking rents at $60.99 per square foot as of June, only surpassed nationally by Manhattan’s $71.34 per square foot. However, despite increased leasing activity, San Francisco continues to face difficulties filling office space. The market recorded the highest vacancy rate among leading U.S. office markets at 25.4%, equal to an increase of 190 basis points from last month and 430 basis points over year-ago figures.  

Most Western tech markets are on a similar trajectory. Seattle (23.2%) and Denver (22.1%) also ranked among the top five U.S. office markets for highest vacancy rates in June. Asking rents were on a downward trend across most markets in the West. Average rents in Seattle fell 5.3% to $36.65 per square foot, Portland’s rates decreased by 4.0% to $27.56 per square foot, while Los Angeles saw a decrease of 2.7% to $41.06 per square foot. 

Regarding new office supply, life science hub San Diego continued to lead the West on a percentage-of-stock basis in June, with 3.9 million square feet under construction, equal to 4% of total stock. This marks a significant reduction from year-ago figures, when 5.2 million square feet were under construction, accounting for 5.6% of its inventory at the time. This drop is primarily attributed to the normalization of life science development throughout 2024, following a historical surge in construction starts over the past two years. 

Midwestern Markets 

Chicago Records the Lowest Average Sale Price Nationwide 

The Midwest continued to offer some of the most affordable asking rents nationwide, with all metros recording rates well below the national average of $31.67 per square foot. With rising interest rates and a surplus of available space, the distress in the office sector contributes to lower rental rates as owners seek to reduce vacancies and cover operating costs.  

Detroit posted the lowest average rental rate among the top U.S. markets at $22.00 per square foot, while Minneapolis-St. Paul ranked the third-lowest rate nationally at $24.93 per square foot. Meanwhile, Chicago’s average asking rent of $27.81 per square foot was the sixth lowest nationwide. 

Midwest Regional Highlights 

The new supply pipeline in the Midwest is sluggish, with the region recording some of the lowest levels of construction activity among the leading U.S. office markets. Chicago was at the forefront in the area, with a little over 1 million square feet of office space under construction. Detroit followed with 524,000 square feet underway, while Minneapolis-St. Paul only had 435,666 square feet under development, the second-smallest construction pipeline nationwide.  

In terms of office transactions, discounted sales are becoming increasingly common in Midwestern office markets. Chicago, despite leading the region with $345 million in deals, saw office properties trading at the nation’s lowest average price of $89 per square foot. Detroit, with the lowest sales volume in the Midwest at $94 million through June, had slightly higher prices than Chicago, at $98 per square foot. 

Southern Markets

Austin Maintains Steady Construction Activity Amid Market Fluctuations 

Despite market challenges, Southern metros continued to see some of the most robust construction activity nationwide. Austin had the largest development pipeline in the South on a percentage-of-stock basis, with 4.6% of its existing stock equal to 4.3 million square feet underway.  

In Austin, several office projects are part of larger mixed-use developments, such as Sixth and Guadalupe, poised to become Austin’s tallest building, featuring 66 stories of office and residential space. In terms of new construction starts, Austin and Los Angeles were among the only two markets nationwide to kick off new projects in June. 

Miami had 2.9 million square feet of office space in progress, accounting for 4% of its inventory, followed by Nashville with 2.1 million square feet, equal to 3.6% of total stock. The Dallas-Fort Worth metroplex led the region in terms of construction volume, with nearly 5 million square feet underway, comprising 1.8% of its existing stock. 

South Regional Highlights 

Washington, D.C., led the South in sales, closing deals worth $1.3 billion through June, surpassed nationally only by Manhattan’s $1.4 billion total. Washington, D.C., ranked third in the region regarding sale prices, with an average of $250 per square foot. Austin and Miami were the regional leaders in sale prices, with properties trading at $439 per square foot and $368 per square foot, respectively. 

Miami maintained its position as the most expensive office market in the South, closing June with an average listing rate of $49.79 per square foot. Austin ($42.52 per square foot) and Washington, D.C., ($39.78 per square foot) were close behind. In contrast, Orlando recorded the second-lowest rental rate in the country at $24.47 per square foot.  

Considering U.S. office vacancy rates, Houston had the highest vacancy rate in the South at 23.8%, up 133 basis points from the previous month. Next, Austin recorded a 22.9% vacancy rate, followed by Dallas-Fort Worth with 21.8%. 

Northeastern Markets

One Large Transaction Pushes Manhattan Sales Volume Over $1.4 Billion 

Sales volume in Manhattan has experienced significant growth in the past month, rising from $570 million as of May to $1.4 billion through June. This surge was mainly skewed by one large deal, an office building at 980 Madison Avenue sold for $560 million to a company affiliated with Bloomberg, according to CommercialEdge data. The 134,000-square-foot building is considered an art institution, home to several galleries. The selling price is far higher than the building’s 2021 appraisal of $350 million, considering office values have decreased in the past three years.  

This makes Manhattan the national leader in sales volume and average sale prices, with properties trading at $588 per square foot, almost 67% higher than month-ago figures ($300 per square foot). Manhattan also remained the priciest office market in the U.S., with asking rents at $71.34 per square foot at the end of June, up 1.1% from year-ago figures. 

Northeast Regional Highlights 

Boston continued to lead the nation in office development with a pipeline comprising nearly 12.5 billion square feet and accounting for 5% of its total stock, more than four times the national average.  

According to our data, two life science offices were completed so far in 2024, totaling over 570,000 square feet. The market is looking to expand its inventory by 10.8%, considering planned projects. One of the most ambitious office projects in Boston is Phase 2 of Fenway Center, a 1-million-square-foot air rights development set for completion in 2025. 

Office Space Under Construction (Million Sq. Ft.) 

In contrast, New Jersey had the smallest construction pipeline in the Northeast, with 1.9 million square feet of space underway as of June, accounting for 1% of its inventory. Higher interest rates, stricter lending standards and the market’s shift toward mixed-use developments are contributing to a slowdown in purely office-oriented projects. 

Office-Using Employment

Miami Leads a Lackluster Pack 

Office-using sectors of the labor market collectively lost 2,000 jobs in June, according to the Bureau of Labor Statistics. This decline was driven by the Professional and Business Services sector losing 17,000 jobs in the month, while Information added 9,000 jobs and Financial Activities added 6,000. On a year-over-year basis, office-using sectors have expanded by 94,000 workers, an increase of just 0.3%.  

Office Using Employment 

Metro data, which trails the national release, indicated a shift toward negative growth in more metros in May. Of the 120 markets tracked by our database, 38 had positive year-over-year growth. Among the top 25 markets, only seven have seen expansion in office-using sectors over the last year. Miami stands out as the only top market with growth exceeding 1%, as the city has seen a bevy of relocations from both workers and corporations during this decade. However, the fact that its growth is so muted illustrates the current stagnation in office job growth. 

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Methodology 

This report covers office buildings 25,000 square feet and above. CommercialEdge subscribers have access to more than 14,000,000 property records and 300,000 listings for a continually growing list of markets.  

CommercialEdge collects listing rate and occupancy data using proprietary methods.  

Listing Rates — Listing Rates are full-service rates or “full-service equivalent” for spaces that were available as of the report period. CommercialEdge uses aggregated and anonymized expense data to create full-service equivalent rates from triple-net and modified gross listings. Expense data is available to CommercialEdge subscribers. National listing rate is an average of all markets. Prior to July 2024, this report used the top 50 markets for a national average.

Vacancy — The total square feet vacant in a market, including subleases, divided by the total square feet of office space in that market. Owner-occupied buildings are not included in vacancy calculations.  

A and A+/Trophy buildings have been combined for reporting purposes.  

Stage of the supply pipeline:  

Planned — Buildings that are currently in the process of acquiring zoning approval and permits but have not yet begun construction.  

Under Construction — Buildings for which construction and excavation has begun.  

Office-Using Employment is defined by the Bureau of Labor Statistics as including the sectors Information, Financial Activities, and Professional and Business Services. Employment numbers are representative of the Metropolitan Statistical Area and do not necessarily align exactly with CommercialEdge market boundaries.  

Sales volume and price-per-square-foot calculations for portfolio transactions or those with unpublished dollar values are estimated using sales comps based on similar sales in the market and submarket, use type, location and asset ratings, sale date and property size.  

Year-to-date metrics and data include the time period between January 1 of the current year through the month prior to publishing the report.    

Market boundaries in the CommercialEdge office report coincide with the ones defined by the CommercialEdge Markets Map and may differ from regional boundaries defined by other sources. 

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