Three subsequent quarters of gains have positioned office properties well on their way to recovery, particularly as they reap the benefit of businesses acting on their back-to-work plans and many still heavily hiring amid record-low unemployment rates.
Office Average Price per Square Foot by Quarter
Since they were one of the asset classes most heavily impacted by the coronavirus, office assets have performed admirably in 2022. Average prices per square foot rose 12.65% last quarter and jumped an impressive 40.86% from their lows at the start of the pandemic.
Unpriced listings saw a slight decrease, with 13.1% of new listings going unpriced compared to 14.36% in Q1 2022. This decrease is a further sign of improved seller sentiment amid rising valuations. Businesses have essentially settled the debate as to whether they’ll need office space (answer: they still do), and whatever method they’re using to occupy space, many office owners have adapted to meet specific needs such as environmentally-friendly features, sanitation standards, and so on.
Average Office Occupancy by Quarter
We also see sector health in office occupancy levels. While return-to-office has gone very slowly, offices on Crexi hit the highest occupancy levels since Q3 2020 last quarter, with 69.7% of new space filled on average and 83% reported overall. While it’s a far cry from the two year-over-year’s 81% occupancy, the sector is crawling towards a steadfast, more lasting recovery instead of moving in a quick rush.
Transaction data shows that office buyers, on average, are finding pretty good deals, with cap rates closing at an average of 7% in Q2 2022. While this is a 30 BPS decrease annually, a suitable office property may provide promising returns to the discerning investor, especially before capital becomes more expensive.
About 3% of closed transactions on Crexi were offices in Q2, valued at approximately $15.1B and about 77.1M square feet total. Many of the assets closed were on the smaller side, with a median size of 3,526 square feet, indicating a higher tenant preference for smaller remote parcels to supplement overall occupancy.
Office Median Asking vs. Sold Cap Rate by Quarter
Rising interest rates had the same impact on prospective office buyers as on other asset classes, resulting in an 11.7% drop in office lead activity (even though the total represents a 25.5% gain annually). Search activity remains at its highest levels and represents an encouraging rebound from pandemic- impacted office shutdowns and the long-winded “return to office” saga. Changes have moved more slowly in big cities than secondary markets.
Cities with Highest Office For Sale Demand
Office lease rates held steady in Q2 2022, similar to other asset classes on Crexi, with less than a percentage point change compared to the previous quarter and hardly any change annually. Landlords with office space are holding off on asking rate increases, mainly because they can’t yet limit their viable tenant options by charging higher rents.
With these minute rate adjustments, we also observed a decline in specific office subtypes for lease. Of note, landlords added 10% fewer coworking spaces to the platform – symptomatic of office occupiers opting for longer-term (and perhaps cheaper) leases now that the employees are more comfortable returning to work. Office tenants’ activity stayed at all-time highs, up an additional 1.8% from last year’s record search activity, further showing these prospects’ commitment to finding longer-term viable space.