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The Office Market Is in Turmoil. So Why Are Rents More Expensive?

Owners will do everything they can to avoid cutting rents—a critical metric used to determine property values

March 26, 2024 at 5:30 am ET

San Francisco is one of the few cities showing a sharp decline in office asking rents. Photo: Jason Henry/Bloomberg News

U.S. office markets are suffering from soaring vacancy rates, a record amount of available sublease space, and rising defaults. But curiously, office rents are holding steady or even climbing. 

Average U.S. asking office rents are $35.24 a square foot, compared with $34.92 in the fourth quarter of 2019, according to data firm

Higher asking prices are a reflection of the seemingly oddball way the commercial real-estate market works. Rents are a critical metric used by lenders and others to determine the value of a property. Owners will do everything they can to avoid cutting them, even if it means keeping space vacant because the rental prices deter prospective tenants. 


Landlords who cut rents significantly to fill empty space “would significantly reduce the appraised values of their buildings,” said David Bitner, the head of global research for

, a commercial real estate services firm. “This in turn could lead to a covenant default on their loans or at minimum would make it harder for them to refinance.”

Office rents are expected eventually to tumble, probably after owners and lenders are forced to restructure mortgages or sell distressed properties.

For now, landlords are trying to justify the elevated levels by lavishing new tenants with expensive interior build-outs, months of free occupancy and other incentives. 

“I’ve even heard of a year of free rent for a 10-year lease term,” said Phil Mobley, CoStar’s national director of office analytics. In the past, the standard free rent in many markets was one month for every two years. 


Some say the strategy is being stretched to the breaking point. Office vacancy is at record levels and continuing to rise because companies that adopted flexible workplace strategies during the pandemic are leasing less space. 

Declining Demand, Rising Rent

The average vacancy rate for U.S. office space has risen. So has the average rent.

U.S. vacancy rate

for office space

Average asking rent

for office space


$36 a square foot

















Source: CoStar Group

Businesses occupy 200 million square feet less than they did before the recession, according to CoStar. Another 150 million square feet of this so-called “negative absorption” is expected to be added over the next two years.

The total negative absorption during the financial crisis was 50 million square feet. “We are at a different order of magnitude,” Mobley said.

The office delinquency rate on mortgages that have been converted into securities has soared to 6.63%, more than triple the 1.87% rate in January 2020, according to data firm Trepp.


Some of these restructuring talks will lead to sales or foreclosures, actions that will reset the value of properties to reflect market conditions, not the propped-up rents. On average, the value of office buildings in central business districts fell close to 41% from July 2022 to the beginning of this year, according to an MSCI index.

New owners who pay these much lower prices won’t need to prop up rents. Indeed, they’ll have a strong incentive to cut rents to lure tenants away from competitors.

San Francisco, which has seen some of the most distressed sales of properties, is also showing the sharpest declines in asking rents. On average prices have fallen to $53.78 a square foot in the first quarter of this year, down from $75.93 in the fourth quarter of 2019, CoStar said.

“The market has been quicker to adjust to the new reality,” Mobley said. 


Adyen, a global fintech firm, had numerous attractive options when it began looking for new San Francisco offices for its North American headquarters early last year. “I had brokers all over me,” said Davi Strazza, president of Adyen North America.

The company announced this month it will be moving into 150,000 square feet of sublease space. Strazza declined to discuss economics but he agreed that they reflected the market strain. “The stars really aligned,” he said.


What do you think the demand for office space will look like a year from now? Join the conversation below.

Other deals are likely to follow, ending the extended period of elevated rents. More than 70% of current office leases were signed before the pandemic, according to Newmark. As they come up for renewals, those tenants will benefit from the market softness. Many businesses have committed to new hybrid workplace strategies that require less space. 

Companies with hybrid strategies required employees to be in the office 2.57 days in February, just a slight increase from 2.49 one year ago, according to Scoop Technologies, which tracks workplace strategies.

When companies with hybrid strategies renew leases, they tend to take less space. “You’re going to have this continued exertion of downward pressure from lease renewals,” said Rob Sadow, chief executive of Scoop.

Write to Peter Grant at peter.grant@wsj.com


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