This is another sign that the U.S. office market has hit an extremely important inflection point after a long period of intense gestation. For the first time in more than a quarter-century, office demolitions and conversions are eclipsing new office construction. This shift is much bigger than the real estate landscape. This move marks a new era for commercial real estate, as the market reacts to communities’ and consumers’ growing needs.
After four extremely negative quarters in a row, absorption in the U.S. office market has gone up overall on a net basis. That’s a huge rebound from a dark time when net absorption fell below zero for six straight quarters. Absorption is picking up and office leasing activity has come roaring back. In reality, it increased by 18% just in the first quarter this year over last.
Over the past seven years, office-to-multifamily conversions have produced around 33,000 new apartments and condos. On average, each of these conversions produces a net gain of about 170 units. Indeed, current projections indicate that by the end of this year, 23.3 million square feet of office space will be torn down. Further, up to half of new construction may flip in the largest 58 U.S. markets.
CBRE, which has been tracking office conversions and demolitions since 2018, recently spotlighted an historic and alarming first for the market. The firm’s Americas head of office research, Jessica Morin, said there was reason for optimism around these changes.
“The office market will benefit as obsolete space is removed from the market in favor of the highest and best use. Additionally, conversions will boost the vibrancy of neighborhoods within various markets.” – Jessica Morin, CBRE Americas head of office research
Positive absorption figures aside, offices vacancies have jumped to an all-time high and now stand at nearly 19%. This small net decrease in office space will bring down the expected vacancy rate. Stay tuned for even more progress in subsequent quarters! This could be a significant revenue stream for building owners, said Mike Watts, president of investor leasing at CBRE Americas.
“This net reduction – albeit slight – of office space across major markets likely will contribute to lowering the vacancy rate in the quarters ahead, which would benefit building owners.” – Mike Watts, CBRE Americas president of investor leasing
As the trend continues, developers are preparing to convert 85 million square feet of office space in the next few years. Currently there are nearly 43,500 units still to come from conversions already in the pipeline at the present. As we look at what’s actually planned for construction, there is a gaping chasm. Just 12.7 million square feet of new office space will get built across those markets.