Large office sales this year will have a greater influence on market averages in 2023 because of the slowdown in sales. 

Sales of office buildings in the first quarter totaled just $6.5 billion — a 66% decline from $18.9 billion in the first quarter last year, according to a recent report from CommercialEdge.

In New York City, $417 million in office sales averaging more than $1,000 per square foot have occurred this year. But that rate is heavily influenced by Hyundai’s $274 million purchase of 15 Laight in the Tribeca neighborhood.

So far this year, Boston is leading in sales of office properties at $680 million, followed by Miami at $435 million, Houston at $431 million and Manhattan at $417 million.

Among Western markets, Los Angeles and San Francisco had the largest sales volumes, closing $343 million and $316 million in deals, respectively, during the first quarter. Seattle’s $46 million total was the fourth-lowest among the top 25 U.S. office markets, and Portland reported zero sales.

Lagging Construction Pipeline

The sector’s lackluster performance is the result of rising interest rates, declining values, decreasing demand and the looming threat of maturing loans, which is impacting the construction of new buildings as well as sales of existing office properties.

The office construction pipeline has decreased over the past few years, with developers starting construction on just 6.1 million square feet of office space so far this year. That’s less than half of the 14 million square feet started during the first quarter of 2022.

Boston — the largest life science hub in the nation — had the most office space under construction in March at 13.1 million square feet, followed by Manhattan at 9.27 million square feet; San Francisco at 7.84 million square feet; and Seattle at 6.41 million square feet.

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Construction starts for office buildings are expected to remain stagnant for the foreseeable future except for in the life sciences arena.

As more workers continue to work remotely as a result of the COVID-19 pandemic, many cities are looking at converting office space to residences. 

Government incentives in some markets are enabling office-to-residential conversions, but not all vacant offices will be suitable for it either because of their location or the building’s configuration.

“As a larger portion of the existing office space becomes functionally obsolete, the idea of converting these spaces into residential is going to be more prevalent as conversions look to be a more viable option than initially thought,” CommercialEdge Senior Manager Peter Kolaczynski said.

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