Falling Office Vacancy Contrasts with Rising Distress
Large office properties continue to face pricing challenges as investors favor amenity-rich assets, Yardi Matrix data shows.
Discounted sales are still rising in the sector for properties unable to adapt to shifting demand, according to the latest Yardi Matrix national office report.
Though vacancy is on the decline, office utilization has not significantly increased, while hybrid work remains widely adopted. Kastle’s Back to Work Barometer indicates that office attendance has remained at around 55 percent for the last few years. Office fundamentals remain challenged, making a sustained decline in vacancy unlikely. Market bifurcation across property types will continue as AI adoption increases.
Distress continues to rise across the sector. Since 2024, distressed properties accounted for 19.4 percent of the 800 million square feet of space that changed ownership—up from the 6.2 percent of transactions between 2021 and 2023. Urban core assets are experiencing the highest rate of distress. Since 2024, distressed transactions accounted for 34.6 percent of the square footage sold in CBDs, compared to 24.5 percent for urban areas properties and 12.1 percent for suburban spaces.
CBD office properties continue to face pricing pressures as flight-to-quality trends concentrate demand into fewer properties. Since 2024, 73 percent of properties in CBDs with at least two sale prices for comparison traded at a discount, in contrast with 48 percent of urban transactions and 42 percent of suburban deals. Seattle illustrates this trend, as hybrid work persists and tech layoffs continue to weigh on its urban core. A 47 percent-vacant, 44-story tower in the city’s CBD is currently under contract to be sold for $280 million—54 percent lower than its 2019 sale price. If completed, Spear Capital will buy U.S. Bank Center from Perform Properties, a Blackstone subsidiary.
READ ALSO: Navigating the Distressed Asset Life Cycle
A historically low construction pipeline should ease pressure in the sector. Uncertainties about rising inflation and AI adoption will require greater flexibility from owners. Properties that can adapt to these changes will likely benefit, while coworking and flight-to-quality trends will continue to reshape demand.
The national office vacancy rate stood at 17.6 percent as of May—180 basis points lower over the past 12 months. San Francisco recorded the highest decrease nationwide, a 520-basis-point drop to a 23.3 percent rate. Manhattan stood out as the market with the lowest rate nationwide, at 13.1 percent, followed by Miami’s 13.2 percent. In contrast, Austin (24 percent) recorded the highest rate.
National in-place rents stood at $33.61 per square foot in May—up 70 cents from the previous month and 1.4 percent lower than a year ago. Manhattan led the charts for office rents, with listing rates at $69.29 per square foot, followed by San Francisco ($62.11 per square foot).
National pipeline shrinks, weaker assets struggle
The national under-construction pipeline comprised 28.7 million square feet, accounting for 0.4 percent of existing stock. Year-to-date through May, office deliveries totaled 9.9 million square feet.
Boston led again in office development, with 3.9 million square feet underway. Manhattan followed with 3.1 million square feet. Austin continued to be among the metros with the largest pipeline, with 1.2 million square feet underway, despite its activity dropping by more than half over the past 12 months.
The U.S. office sector saw 1,025 transactions closed, with properties selling for $213 per square foot on average, generating $23 billion. The leader for office investment remains Manhattan ($3.7 billion), followed by San Francisco ($2.3 billion) and the Bay Area ($1.7 billion).
On the opposite end of the list is Portland, where office sales totaled $106 million. Since 2024, 53 percent of transactions in the metro sold at a discount compared to their previous sale price. Portland office space sold at $91 per square foot on average in 2025—73 percent down from the 2020 peak—and $119 per square foot so far in 2026.
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