That asking office rents have actually risen in an era of historically high vacancy rates presents something of a conundrum to commercial real estate observers. Several factors help explain this phenomenon, but the rapid rise in consumer prices that peaked in 2022 is an important piece of interpretive context.
After a slight dip in 2020, office asking rents — the advertised “sticker price” for leased workplace space — stabilized despite an unprecedented increase in vacancy. As of the end of the third quarter of this year, the average asking rent has increased nearly 2% since the end of 2019.
There are a few exceptions, most notably among office markets that have been particularly hard-hit by occupancy losses. For example, office rents are down about 8% in Seattle and San Francisco has seen a startling 30% plunge. By and large, however, office asking rents have held the line nationally.
The asking rate, of course, represents the price landlords quote before any serious lease negotiations take place, and that is crucial to keep in mind when attempting to understand market conditions. Equally important is the macroeconomic environment, which gives a sense of the performance of office rents relative to hypothetical alternatives.
The main economic story of the past three years has been the rapid rise in consumer prices. While inflation has moderated substantially in the past few months, the general price level as measured by the headline consumer price index, or CPI, is 23% higher than it was at the end of 2019.
The CPI is not a perfect benchmark for commercial rents, but it is directionally useful. Average rental rates tend to move in line with the CPI over the long term, frequently exceeding it in times of economic expansion. This is one reason commercial real estate is viewed as an attractive investment opportunity.
The breathtaking rise of industrial rents since 2019 offers a shining example of this outperformance. Cumulatively, asking rents for industrial space have advanced a full 15 percentage points faster than consumer prices. Industrial property owners who have been able to mark their leases to market have thus achieved healthy gains in real income.
Apartment rents have been more volatile. Accelerated migration patterns during the pandemic contributed to heady rent growthwith average asking rents outpacing inflation, especially in 2021 when apartment rent growth increased nearly 10%. Since then, multifamily rent growth has slowed dramatically. Still, the overall level of apartment rents has climbed almost 19% since the end of 2019, within shouting distance of the increase in CPI.
In that same time, average retail rents have risen about 16%, trailing the rate of inflation. Even so, this is nearly nine times the growth rate of office rents.
On average, office owners trying to fill space find themselves asking rates that are more than 20% lower than they would be if the price of office space had kept pace with other prices over the past four and a half years.
In the face of skyrocketing vacancy, asking why office rents have not plummeted is a reasonable question. The answer is complex, but part of it is that, in real terms, office rents actually have declined.