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By Wolf Richter for WOLF STREET.
The glut of vacant offices on the market for lease, as depicted by availability rates, rose to new records in many major office markets in Q3, despite pronouncements by landlords that the office glut has bottomed out. The availability rate is the office space on the market for lease either by the landlord directly or by a tenant as a sublease, expressed as a percentage of the total office market.
Of the 15 office markets for which Savills released data today, these five had the biggest office gluts:
San Francisco: 36.6%
Atlanta: 30.6%
Dallas-Ft. Worth: 30.0%
Chicago: 29.4%
Houston: 29.0%
Of the 15 markets, 6 hit new records, and 1 matched its prior record:
San Francisco: 36.6%
Atlanta: 30.6%
Chicago: 29.4%
Los Angeles: 28.3%
Seattle: 28.2%
Silicon Valley: 27.6% matched prior record
Washington DC: 24.4%
Within a hair of their record were Dallas-Ft. Worth (30.0% v. 30.1% in Q1 and 29.8% in Q4 2023) and Philadelphia (25.2% in Q3 from 25.3% in Q1).
The chart shows the availability rates at three different points in time: red = Q3 2024; purple = Q1 2021; gray = Q1 2019.
The year 2019 (gray in the chart above) was when “office shortage” was still promoted by the CRE industry to bamboozle companies into leasing office space they didn’t need, and would never need, and they jumped on anything that came on the market, just so they could save it for later when they grow into it. This warehousing of office space propelled the office-shortage propaganda to the next level. But during the pandemic, CEOs embarked on a big rethink – and this vacant office space suddenly started showing up on the sublease market.
A lot of the leasing activity since then consisted of renewals, relocations, and downsizing – with no positive impact on availability rates. There is also a flight to quality, with the latest and greatest office buildings attracting tenants away from older buildings that are then doomed.
These older buildings then have huge vacancy rates, don’t collect enough rent to make their interest payments, and default. Those older office properties have sold for 50% to 70% off some prior price.
And in some of the deals where the building was split from the land, the land had value, and the building was essentially worthless, which happened among others, to this 925,000-square-foot office tower in Manhattan – land value being the ultimate value of older office towers.
San Francisco was the hottest office market in the US in 2019, sporting an availability rate of 7.9% amid deafening industry hype about the “office shortage,” triggering epidemic-scale office space hogging by companies such as Meta, Twitter, Google, and many others.
Back in Q1 2019, Savills’ quarterly office market report called it “the war for space”:
“New supply is limited with only a handful of projects underway, and all new product completing this year has already been pre-leased to-date. The technology, advertising, media and information (TAMI) and coworking sectors continue to dominate the war for space.
“Rapid rise of coworking offers flexible options WeWork, HQ by WeWork, and Knotel accounted for five of the ten largest leases in San Francisco during Q1. These leases alone added 260,000 sf to an already robust coworking inventory.”
Alas, Knotel filed for bankruptcy in January 2021, and WeWork finally filed for bankruptcy in November 2023.
In Q3, 2024, San Francisco’s office glut set a new record with an availability rate of 36.7%, despite all the AI hype. Savills:
“While there has been cautious optimism in 2024 that the office market might have bottomed out, with AI companies sustaining demand, corporate occupiers have continued to consolidate their office space, such as X Corp. announcing their intention to vacate both Market Square North and Market Square South this quarter.”
Leasing activity increased a tad to 1.7 million square feet (msf) in the quarter, with 315,000 square feet (sf) being leased by OpenAI, the largest deal in the quarter. A substantial portion of the remainder of the leasing activity was relocations and renewals with a net of zero impact on the market, unless they were downsizing, which would add to the glut.
Asking rents for class A space have dropped about 24% from 2019, but remain very high, at $68.22 per square foot (psf) per year, which is part of the problem.
And yet, San Francisco is one of the exceptions. In most other office market, asking rents continue to rise despite the epic office glut. Landlords are often locked in by their loan contracts, and by the reality that if they cut rents enough to fill the building, the lower rents won’t pay the interest on the loan, and they’ll default anyway.
Atlanta sports the second-worst office glut of these markets here, with an availability rate of 30.6%. Sublease space on the market remains at about 8.6 msf, including “notable blocks of large space from IBM, Elevance Health, and Cox Automotive,” Savills said in its report for the Atlanta office market.
Of the 10 largest leases signed during the quarter, 6 were renewals and relocations for a total of 438,000 sf, with no net impact on availability rates. Only four leases were for new locations, totaling 256,000 sf.
Despite the office glut, asking rents continue to increase, which is obviously part of the problem, and in Q3 rose 4% year-over-year to $32.57 per square foot per year, up from about $20 psf in 2019, which is nuts. Landlords are trying to overcome the high rents with big incentives, such as tenant improvements and rent abatements. And so the glut remains at record levels.
In Dallas-Ft. Worth, the third-worst office glut of these markets, availability rates have been around 30% for over two years.
There was quite a bit of leasing activity in Q4, with 4.2 msf in leases signed, roughly in line with 2019. But 8 of the largest 10 deals were renewals, and 1 was a relocation, with no impact on the office glut. Only the smallest of the 10 deals was a new location.
And yet, asking rents jumped 8.4% in Q3 year-over-year to $30.92 per square foot per year. But here too, landlords are trying to make up for it with incentives, such as tenant improvements and free rent, according to Savills.
Downtown Chicago set a new record for its availability rate at 29.4%. Here too, there is a flight to quality, with high-end spaces in great locations finding demand, and class A availability dipped to 24.2%.
But everything else sank deeper into trouble, with class B availability reaching new record highs, “while occupier demand waned and landlords found themselves at a crossroads, lacking sufficient capital to execute leases or to make monthly loan payments,” Savills said.
And the overall asking rents continue to rise, up 3.8% year-over-year, with class A asking rents up 6.0%.
Houston was for years the worst office glut in the US due to the American Oil Bust that started in late 2014, eventually pushing availability rates to over 30%, while San Francisco was still bathing in the aura of its office shortage. Houston was recovering from all this when the pandemic hit, and availability returned to 30%-plus by Q1 2021.
In Q3, 2024, Houston’s availability rate worsened to 29%, compared to 28.1% a year ago. Of the top 10 leases, the largest 8 were renewals and relocations. And yet asking rents – you guessed it – have been rising, including in Q3, by 1.8% year-over-year to $36.70.
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The post Epic Office Glut Hits Records in San Francisco, Atlanta, Chicago, Los Angeles, Seattle, Washington DC. Dallas Availability Rate Dips to 30%, Houston rises to 29% appeared first on Energy News Beat.
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