After years of deep distress, the plagued US office market reached an inflection point. This year, office conversion and demolition will surpass the new construction for the first time in at least 25 years.
Simply put, according to exclusive new data from, more office space has been removed than reducing the overall office footprint. CBRE Group. Commercial real estate services companies have been tracking this since 2018, but estimates that such dynamics may be the first time this century has been rolled out for longer.
CBRE has discovered that 23.3 million square feet of space in the largest 58 US markets are scheduled for demolition or conversion to other uses by the end of this year. In comparison, developers are projected to complete construction of 12.7 million square feet of office space in the same market.
“This net reduction, albeit small, will reduce office space across key markets, contribute to lower vacancy rates in the last quarter, and benefit building owners,” said CBRE US President Mike Watts, investor lease.
All this is driven by a fundamental change in office attendance due to the growth of a remote working culture since the start of the pandemic. Office vacancy has skyrocketed to record highs, but still floats around 19%.
However, the market is beginning to recover. More employers have ordered staff to be returned to the office full-time, and as the job market strengthens, more employees can get, even if it means more in-person attendance.
Net absorption, the space, the amount of space occupied every quarter, has been positive for the last four quarters, which has been negative for six consecutive quarters. Office lease activities increased 18% in the first quarter of this year compared to the same time frame last year.
Office rents should be stable as supply is low and demand steadily increases. Rents have recovered for major office locations and for so-called Class A spaces. The beneficiaries of that space are some of the major office REITs, such as Vornado. BXP, Alexandria Real Estate Stock and SL Green.
“The office market will benefit as outdated spaces are removed from the market in favor of the best and best use. Furthermore, conversions will boost the vitality of the neighborhoods within various markets.”
Additionally, developers will be preparing an additional 85 million square feet of office space for conversion over the next few years. Since 2016, according to CBRE, office conversions to multi-family homes have generated around 33,000 apartments and condominiums, considering that on average, historically, about 170 units. The pipeline has around 43,500 units from the already in progress conversion.
Reducing overall office space is a positive for commercial real estate, but it is slower.
“The trend in conversions faces several headwinds. The pool of buildings that are best suited to conversions decreases over time, and the costs of construction labor, materials and financing remain high,” Watts said.
