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The US office market slumped again this year, entering a new phase of downturn that could last for years to come, a report said this week.
The report from data industry provider CommercialEdge shows office vacancies jumped more than 5% in six of the top 25 US markets this year.
Sale prices for offices, meanwhile, fell again. Office properties sold at an average of $179 per square foot, down 9% from the average sale price last year, though that marks a slowdown from the 24% drop from 2022 to 2023.
More offices are also selling below their previous transaction value, with some properties going for even lower than they did in the 1990s, the report said.
New construction was also down this year, with only 9.1 million square feet of office space starting construction at the end of November as developers pulled back on most projects amid lower demand and rising vacancy rates.
CommercialEdge says the data marks a new, possible decades-long phase of the downturn for the office sector, which has lagged the broader commercial real estate market recovery that's taken hold since the COVID-19 pandemic subsided.
"We've entered the beginning of the 'slog' phase for what we expect to be a multi-decade transformation of the office industry. We've seen some winners and we've seen some losers, but the threats of difficulty in refinancing and modest physical occupancy numbers remain," Peter Kolaczynski, the firm's director, said in a press release.
The situation isn't uniform across markets, with some that saw a pandemic-era population boom now struggling with too much office space after developers overbuilt.
Texas, in particular, has seen its vacancy rate shoot higher, with Austin recording the highest increase out of the top 25 US markets, up 6.5% in the last year.
"The market's strong in-migration and job growth in recent years have not been enough to offset the impact on vacancies of a wave of new supply," CommercialEdge said.
Meanwhile, Midwestern markets have the most affordable office space nationwide, with sales prices in Chicago and Detroit standing at $97 and $80 per square foot, respectively. Detroit recorded the lowest average sale price among all markets covered within the report, and the highest vacancy rate in the Midwest at 25.2%.
Manhattan, meanwhile, continues to dominate sales volume, with over $3.8 billion in transactions through November.
Return to office mandates in the finance sector have helped the city's office market activity, with big purchases from firms like JPMorgan Chase, which purchased a $320 million building in Midtown this summer next door to another tower it's currently building.
The data comes as the lingering effects of the COVID-19 pandemic continue to weigh on the office sector. Companies are reevaluating their space needs amid hybrid work schedules.
Several high-profile companies like Amazon, Dell, and Meta introduced stricter return-to-office mandates this year, warning employees they could face lower chances of promotion or even termination if they don't follow office attendance guidelines.
Still, office utilization nationwide appears largely unchanged.
Kastle Systems and Kisi Access Control, which analyzed aggregated office access data, indicated only slight increases in office usage throughout the year, the report said.
The real estate market has been fretting over the state of the office sector since the pandemic. Rising borrowing costs and lower valuations have pressured the sector, though some other pros have argued that the worst may be over.
A frequently proposed option for unused office space has been to turn it into apartments. Property experts told Business Insider earlier this year that office distress could lead to as much as a billion square feet of new apartment space in the coming years.
