Office sales volume across the Bay Area was down 85 percent in 2023 compared to the pre-pandemic years, according to new data from Yardi subsidiary CommercialEdge, and pricing is down by one-third.
The data also shows that the office market remained surprisingly strong in the early days of the pandemic, and that prices and volume held steady or even went up slightly in 2020 and 2021, with the downturn beginning in earnest as interest rates skyrocketed in the latter half of 2022.
Low interest rates “absolutely contributed” to the approximately $500 per square foot average price for Bay Area office buildings in 2020 and 2021, said Peter Kolacynski of CommercialEdge. But the most important factor buoying the market at that time was that many buyers expected work from home to “dissipate, rather than become fully entrenched as it is now.”
“Society’s relationship with the office fundamentally changed, and at that time it was not fully realized,” he said via email.
Interest rate increases and a continued desire to remain remote functioned in tandem to slow the market starting in 2022, when sales volume totaled $4.6 billion — about half of the $9.4 billion 2021 and a steep drop from $8.4 billion in 2019. The price per square foot on the 98 transactions in 2022 was about $420 per square foot, compared with about $500 per square foot on 160 transactions in 2021.
When COVID started, half-empty offices were “shocking,” said Kolacynski. But the fact that vacancy numbers have not changed substantially four years later are now baked into deals and led to the pull-back in activity in 2022 and 2023, when financial distress amid rising interest rates and increased vacancy became part of a dour macroeconomic picture.
In 2023, the price per square foot on Bay Area office trades dropped to $318 per square foot, and volume fell to about $1.25 billion. Only 38 buildings changed hands. The first quarter of 2023 was particularly slow, with just four buildings selling, though the price per square foot was much higher at $550.
Prices have stayed under $300 per square foot since the latter half of 2023, when some local investors began picking up steals in San Francisco. Office prices dropped even more in the first quarter of 2024. In the eight trades that took place last quarter, for a total of under 2 million square feet, the price was an average of $217 per square foot. Of the approximately $400 million in office sales in the Bay Area so far this year, about $65 million were in San Francisco.
Asking rents of just under $60 per square foot in San Francisco remain slightly higher than the rest of the Bay Area, where the average is about $54, according to CommercialEdge data. In the U.S. that puts San Francisco second only to New York, where asking rents are more than $71 per square foot.
As the year continues, Kolacynski said he will have his eye on distress activity and what happens to maturing office loans, as well as possible office conversions and other sustained moves away from office development as remote work continues.
“Are we going to see the office property universe begin to shrink in square footage?” he asked.
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