Office Market Sees Multi-Decade Reshuffle as Vacancies Rise

The office sector is in the early stages of a multi-decade reshuffling, with distressed assets expected to increase.
  • The U.S. office market recorded $10.2B in deals through May, with properties trading at an average of $165 PSF.
  • National office vacancy stands at 17.8%, driven by new work dynamics and high interest rates.
  • The office sector is in the early stages of a multi-decade reshuffling, with distressed assets expected to increase.
Key Takeaways

According to the most recent CommercialEdge National Office Report, the U.S. office sector is grappling with the shift to remote and hybrid work models, as reported on Globest. Significant sector distress is expected to persist at least through the end of 2025.

Market Overview

The U.S. office market saw $10.2B in transactions through May, with properties trading at an average of $165 PSF. Chicago led the Midwest with $223M in YTD office sales, despite having the lowest average sale price nationwide at $81 PSF. 

Manhattan, which topped sales volumes last year, fell to fifth place with $570M in sales through May. For context, average sale prices in Manhattan have plummeted 66% since 2023, now at $300 PSF.

Vacancy, Distress

National office vacancy rates rose to 17.8%, up 80 bps from last year. Higher rates have compounded the problem, posing ongoing challenges for office owners trying to extend or renegotiate loans.

Despite these trends, a wave of distress is unfolding gradually, partly because many tenants are locked into long-term, pre-pandemic leases, delaying downsizing decisions.

There were 600 office sales through May, with more properties sold at discounts. By comparison,  there were 2K office deals in 2023, down from about 4K annually in 2021 and 2022. “Acceptance of the current office situation is becoming more widespread,” stated Peter Kolaczynski, a CommercialEdge director. “We anticipate…an increase in distressed assets showing up.”

Regional Insights

San Diego thrived on a strong post-pandemic market for life science properties, but now it faces a glut of unoccupied labs. The market’s vacancy rate increased by 310 bps over the past year, reaching 18.5% in May. 

Meanwhile, San Francisco saw office vacancies rise by 510 bps YoY to 25.2%, the highest rate in the country.

Tech hubs outside California, such as Seattle and Denver, also reported higher vacancy rates, up by 350 and 280 bps, respectively.

Looking Ahead

As remote and hybrid work dynamics continue to become the norm, more creative solutions for handling excess space are expected to emerge. 

And although the new office supply pipeline is slowing down, providing some relief to property owners, the sector may see more distress as it navigates this prolonged adjustment period.

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