Most of the Western U.S. office markets surveyed for this report continued to see office vacancy rates above the national average of 19.4% throughout June. The highest market vacancy rate in the region last month was in northern California: office space in San Francisco was 27.7% unoccupied in June, following a year-over-year vacancy increase of 230 basis points. Meanwhile, Phoenix office market sales close below the national average.

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Other key highlights:

  • San Diego office space logged the largest 12-month vacancy increase in the region — 500 basis points since June 2024, to nearly 23% vacancy last month. 
  • The Bay Area topped the list for sales through June, both in terms of total dollar volume (nearly $3.2B) and for sale price per square foot ($387). 
  • While office assets in top California markets traded above the national average of $189 per square foot, office market sales in Phoenix, Portland, Seattle, and Denver closed below.   
  • The largest asking rents among Western U.S. markets in June were in San Francisco at $63 per square foot, following an increase of more than 3% over 12 months.  
  • Roughly 63% of office construction in Western markets was concentrated in Los Angeles, San Diego, and San Francisco, which led development in the region with around 2 million square feet underway each.

Loan Maturities in the Office Sector Coming Home to Roost

Yardi Research estimates that about 14,000 office properties are encumbered by loans that have recently matured or that will mature by the end of 2027. That equates to 33% of all office loans and adds up to nearly $290 billion. Additionally, at the start of the year, Moody’s reported that the percentage of loans extended in 2024 dropped from the previous year and defaults increased. And, according to Trepp, office commercial mortgage-backed security delinquency rates rose to 11.08% in June, which marked a 3.5% increase from June 2024.

But, what does this all mean? Well, it means that some cans have been kicked just about as far as the road goes, and borrowers and lenders must now confront difficult decisions. While loan extensions have kept borrowers afloat to some extent, lenders are likely to be hesitant to extend loans going further. What’s more, we are likely to see more discounts on office properties in the coming months, as the possibility of office-to-residential conversion becomes more attractive and more public policies are created to support it.

You can read the full report here: https://www.commercialcafe.com/blog/national-office-report/