Preliminary office construction and vacancy data for Q1 2024 paints a picture of ongoing hardship for the office sector, according to the latest office report released by CommercialEdge. Specifically, vacancy rates exceeded 20% in several markets, while new development slowed to a crawl as tight lending continues to pose problems. Still, coworking stands out as one of the office sector’s highlights as companies increasingly turn toward productivity hubs within close proximity of where their employees live.

National Vacancy Rests at 18.2%, Up 120 Basis Points Y-o-Y

Enduring lower demand for office space continues to manifest in low vacancy rates across most U.S. markets. At the national level, vacancy rested at 18.2% after an increase of 120 basis points (bps) in the last 12 months. Accordingly, the national full-service equivalent listing rate as of March 2024 was $37.74 per square foot, dropping 1.3% year-over-year (Y-o-Y).

However, some markets are being hit harder by rising vacancies. San Francisco is the best example of this as vacancies here increased 510 bps in the last 12 months to reach 24.2% in March 2024. At the same time, listing rates also took a hit in San Francisco, dropping 8% Y-o-Y to stop at $60.80. Meanwhile, in the rest of the Bay Area, the vacancy rate was up 350 bps to reach 20.8%.

Otherwise, the second-highest vacancy rate as of March was recorded in Houston with 23.5% of offices standing vacant. Even so, the 12-month change here was an increase of just 10 bps, meaning that vacancies in Space City may be stabilizing. Also in Texas, Dallas experienced the largest increase in vacancy alongside San Francisco at 510 bps to reach 21.6%. Similarly, Austin’s vacancy rate also still sits above 20%, although it actually dropped 20 bps Y-o-Y to 22% in March.

Other markets with vacancies in excess of 20% included Denver (22.7%, up 330 bps) and Seattle (22.6%, up 390 bps). Conversely, the lowest vacancies among the markets studied by CommercialEdge included Tampa, Fla. (12.7%); Boston (12.8%); and Miami (13.3%).

Office Development Dwindles With 87.9MSF of Space Under Construction, Only 2.8MSF Started So Far in 2024

Alongside rising vacancies and dropping cap rates, office construction has also ground to a halt in recent years. In fact, the pipeline has shrunk by as much as 40% in the last two years, falling to 87.9 million square feet of office space as of March 2024.

What’s more, the slowdown in construction shows signs of becoming even more acute: Between 2020 and 2022, office starts averaged around 64 million square feet per year, thereby adding significant space to the pipeline. But, new starts then fell to 44.1 million square feet last year. And, while CommercialEdge notes that data collection lag may influence figures, only 2.8 million square feet worth of office space projects were started in Q1 2024, which indicates another record-low year for office development.

The markets that are seeing the most construction are still the ones with strong life sciences sectors and consistent investor appetite. Of these, Boston is the most significant, being home to 13.9 million square feet of office space under construction — more than 15% of the total stock being built nationally. Notably, the top 10 markets by space being built account for more than half of the office space currently being built in the U.S. Other big players include San Francisco (5.3 million square feet); Dallas (5.15 million square feet); and Austin, Texas (4.3 million square feet).

Coworking Continues Suburban Expansion with 9 Million Square Feet of New Spaces

According to the same report, the coworking sector is experiencing continued growth, although that growth is now mostly localized to suburban locations. In the past year, the national flex space inventory has grown from 113.5 million to 124.8 million. Suburban locations added more than 20 times the amount added by urban locations, at 9 million square feet compared to just 400,000. That said, CommercialEdge reports that the remainder of new space lacks a submarket classification, although most of it is still expected to be located in the suburbs, thereby resulting in an even greater suburban coworking growth.

As things currently stand, the share of suburban coworking space has increased by 3% to 47% in the last 12 months. Excluding Manhattan (the urban market with the most coworking space), suburbs account for 52% of the total coworking inventory. This shift is mostly attributed to companies seeking in-office collaboration in more productive contexts to equip their decentralized workforces with such spaces closer to their homes.

For companies and freelancers looking for top-tier office amenities with lower barriers to entry, coworking can provide an advantageous solution. If you need flex space for your company in the midterm or you just want to work from a professional setting a few days a week, check out what the top coworking markets have to offer or begin a search from the CommercialSearch homepage.

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Read CommercialEdge’s full office report for more details and further data analysis.