Unlike many previous real estate market cycles, today’s office market stagnation is driven more by lack of demand than by too much supply. As the economy continues to recover next year and businesses start to grow again, opportunistic investors looking to buy office space may find good deals in some of the best office markets in 2022.
Things to Know Before Investing in Offices
Cushman & Wakefield predicts a widespread return-to-office in 2022, with most workers going back by the first quarter of the year. Commercial real estate investors looking to buy office property should keep several things in mind to maximize returns while minimizing risk:
- Suburban office markets are expected to recover faster than office property in central business districts.
- Flight-to-quality may accelerate with Class A office properties recovering quicker in 2022, due to rapid improvements in demand, vacancy, and asking rents.
- Remote working will impact the demand for office space in the short term, but large office users such as Amazon, Facebook, and Wells Fargo expect a 98% return to office by Q1 2022, pending COVID developments.
Top Cities to Buy Office Property in 2022
Many office markets around the country are still feeling the effects of the pandemic and economic recession. However, as the year draws close, office building investors have begun to see recovery signs.
Asking office rents are rising, and there is less new office space under construction. Here are the top office property markets (with populations of one million or more), with strong buy and hold recommendations, according to ULI and Cushman & Wakefield:
In addition to being the top market for office investment in 2022, Nashville ranks as the #1 real estate market for investor demand per Emerging Trends. Over the past ten years, Nashville’s population has increased nearly 15%, while the job market has grown over 2% just last year alone.
Nashville’s population of 1.93 million features a young workforce and fast growth rate. The city hosts nearly 46.6 million square feet of office inventory , with average asking rents for Class A buildings at $35.63. Nashville tenants leased an estimated 3.1 million square feet through the end of 2021, with vacancy rates increasing slightly to 19.7%. Developers finished 392,000 square feet of office property in Q3 2021, with another 2.3 million square feet on the way.
For the second year in a row, Charlotte has been ranked the fastest-growing market for tech talent. Over the past 365 days, the metro area has added more than 45,000 new jobs, a trend that positions the city as the forerunner of economic development in the U.S. Population growth exceeded 2.6%, and job growth increased nearly 3.8% over the past year.
The Charlotte metropolitan area is home to 2.64 million residents and 57,206,000 square feet of office space. Through Q3 2021, more than 2 million square feet of new office space has been leased, driving the direct vacancy rate down to 15.6%. Average asking rents are $30.67 per square foot, and developers have over 3.6 million square feet of office space under construction. As of Q3, over 2.3 million square feet have been delivered to the market, with direct absorption at positive 414,145 square feet year-to-date.
Direct asking rents for office space in Denver have held steady throughout the pandemic, and the market booked its first quarter of positive net absorption since Q4 2019. Home to nearly 3 million residents in the metro area, Denver’s population grew 1.2% in 2021, while the job market increased 1% year-over-year.
Leasing activity in Q3 2021 reached its highest point in seven quarters, and institutional investors remain active in the market. Denver has 120,355,000 square feet of office space, with just 661,000 under construction as of Q3. Asking rents average $31.02 and have increased by 4%, with direct vacancy rates at 17.6%.
#4 West Palm Beach
With no state income tax and a pro-business government, a growing number of people and companies are moving to Florida. Over the past year, the population of Palm Beach County grew by 1.5 million residents, and the job market soared by 2.5%.
Population isn’t the only thing that’s growing in West Palm Beach. Current asking rents of $39.71 for office space increased 4.5% year-over-year and are projected to grow more in 2022. The market is home to nearly 23,000,000 square feet of office space, with the Boca Raton submarket accounting for almost 50% of office inventory.
Tenants signed new office leases for 1.5 million square feet, driving the overall vacancy rate down to 14.7%. Only 244,000 square feet of new office space is under construction, all in suburban submarkets.
Over the last 12 months, the resurgence of office-using employment in Miami has created 23,600 new jobs, helping office rents reach $43.60 per square foot, an increase of 6.1% year-over-year. Miami-Dade County is home to over 2.7 million residents and ranks among the top global cities for business activity, human capital, and purchasing power.
New leases have been signed through Q3 2021 for more than 2 million square feet of office space, creating a positive net absorption of 123,000 square feet in the same quarter. The current market vacancy rate of 17.3% is projected to decline in 2022 while asking rents are expected to rise. The metro area is home to more than 46 million square feet of office space, with another 1,193,000 under construction.
While only roughly six miles across in size, Boston’s metropolitan area is home to 4,873,019 residents. The city, known for its universities, medicine, and high-tech research, features a sizable office inventory of more than 209 million square feet, and asking rents of $38.43 per square foot.
Tenants leased 5.6 million square feet in 2021, with vacancy rates decreasing to 14.6%. In Q3 2021, the Greater Boston office market posted positive fundamentals than it did prior to the start of COVID. Boston has had nearly 1 million square feet of new office space delivered year-to-date, with 8.5 million square feet currently in development.
Austin has become one of the most dynamic real estate markets in the country, seeing some of the highest demand for office space since pre-Covid levels. Home to 2,227,000 residents in the metropolitan area, the city has over 59 million square feet of office inventory with high asking rents of $44.77 a square foot.
Over 3.5 million square feet of new leases were signed in 2021, creating a positive net absorption of 237,000 square feet of office space in Q3 2021. With direct vacancy rates down to 15.5% in Q3, over 2,236,000 square feet of new space was delivered to the Austin market year-to-date, with more than 4.5 million currently under construction.
With a population of 2,079,000, Raleigh and Durham have topped many of our “Best Of” property type lists. The city features more than 59 million square feet of office inventory, with average asking rents most recently at $29.35 a square foot. Tenants acquired 2,763,000 square feet of office space this year.
With direct vacancy rates down to 11.9%, the market’s access to talent, employment, and education isare helping improve key fundamentals for the Raleigh/Durham office market. Nearly 1.7 million square feet of new office space was delivered through Q3 2021, with 2,151,614 in the pipeline to meet anticipated demand.
#9 Dallas/Fort Worth
Strong office leasing activity in Dallas/Fort Worth is helping the market stabilize, with increased activity expected in 2022 due to employment growth, corporate relocations, and business expansion. With 7,570,000 people residing in the metro area, the population has increased 0.45% and the job market has grown nearly 1% year-over-year.
Metropolitan Dallas/Fort Worth spans over 9,200 square miles and contains nearly 339,000,000 square feet of office space. Over 6.2 million square feet of new office space is under construction, including 1.0 million square feet alone in the Uptown/Turtle Creek submarket.
Asking rents average $27.85 a square foot, and the current vacancy rate of 19.7% is predicted to decline in 2022. The office market reported positive net absorption of 166,003 square feet in Q3 2021.
#10 Washington, DC – Northern Virginia
Washington, DC, and the nearby Northern Virginia cities are home to 6,280,000 people and boast population and job growth rates of over 0.4%. With over 370,500,000 square feet of office inventory in the metro area, average asking rents of $41.71 are driven by high demand from government and affiliated businesses.
Tenants leased over 12.8 million square feet this year, while inventory experienced an 18.3% vacancy rate in the third quarter. Net absorption was down 628,393 square feet in Q3 2021 but will likely see gains as the workforce returns to the office. Over 1.9 million square feet of inventory was delivered to the market through Q3, with 5.7 million square feet currently under construction.
Office Investment Trends in 2022
As the Emerging Trends in Real Estate 2022 report by PwC and ULI notes, “The pandemic created a massive shock that could transform office property demand.” Technological tools allow many employees to work remotely, while others have chosen to stay in urban areas for increased social and employment opportunities.
When asked what the primary value drivers would be for employees to use physical office space, more than 50% of the commercial real estate professionals surveyed by Emerging Trends placed great importance on collaboration and the continuation of company culture. By contrast, close to 80% said office value drivers such as having a space to meet with clients, increased productivity, and proximity to related companies are of little or no importance.
Here are three key office trends for investors to watch in 2022 and beyond:
Best office subclasses
Before the pandemic, the demand for central business district office space outpaced suburban office properties. Today that trend has reversed, as companies look for space to lease and office investors find better returns in the suburbs and smaller secondary and tertiary markets.
Office subclasses with the strongest buy and hold recommendations are:
- Medical office (85.4% of report respondents)
- Central business district office (82.3% of report respondents)
- Suburban office (74.7% of report respondents)
What workers want
Emerging Trends notes that an essential factor affecting future office demand is where talent wants to live. While some workers have eschewed gateway markets for fast-growing secondary office markets such as Austin, Charlotte, Miami, and Phoenix, other employees have decided to stay put as the pandemic wanes.
In 2022, the choice isn’t necessarily all or nothing when it comes to office demand. Core gateway office markets have a knack for attracting talent, with access to sizable skilled labor pools and options for the next job. By comparison, secondary markets offer employees and businesses cheaper housing, a better quality of life, and a low cost of doing business.
Office market recovery
NAIOP projects a solid return to positive net office space absorption in 2022, with 53.5 million square feet absorbed by the end of the year. While the forecast is dependent on economic growth and a declining pandemic, the data seems to support the positive outlook for office use in 2022.
Although employment levels in prime office-using business sectors such as professional and business services, financial activities, and business services are only 1.5% lower than in February 2020, office utilization rates are still much lower. Use rates began to tick up toward the end of 2021, a sign that workers are becoming more comfortable going into the office than working from home.
Buyers of office space in 2022 may see less investor competition due to uncertain space demands from tenants, which create opportunities for the buy-and-hold investor. Transaction volumes were down significantly in 2020 and 2021 but appear to be rising in the best office markets. Experienced office investors, who focus on property with credit tenants, long remaining lease terms, and high occupancy levels, may generate considerable returns as the economy begins to recover.