Loss Of U.S. Office Space Will Outpace New Construction For First Time Since 2000
For the first time since the turn of the millennium, the U.S. is set to lose more office product than is constructed this year.
A CBRE report set for release Tuesday shows more than 23M SF of office space in 58 major markets will be torn down or converted in 2025. By contrast, those cities have just 13M SF of planned new construction on the books.
Anemic new construction is expected to ease pressure on the market as office vacancies sit near all-time highs at 19%, CNBC reported.
The market saw positive net absorption for each of the last four quarters, and office leasing was up 18% in Q1 over the same quarter last year. Developers also have 85M SF in the office conversion pipeline, with most set for residential redevelopment.
More than 75% of the nation’s active conversion projects will produce multifamily units, while hotels make up around 8%. Conversions to industrial and logistics and life sciences uses are also in the single digits.
About 64% of conversions already underway are located in central business districts. Julie Whelan, CBRE's head of occupier research for the Americas, chalked that up to the desire for top-tier space pushing older office supply off the market in an interview with CoStar.
The Dallas-Fort Worth region leads the U.S. in central business district conversions, with last year's $300M Energy Plaza facelift typifying the process.
Developer Todd Interests spent more than a year renovating the building, which rebranded as The Sinclair. The 1.2M SF tower now houses 239 luxury apartments and 450K SF of high-end office space.
CBRE said this marks the first time the market has reached this inflection point since at least 2000, although it could date back even further.
With rising construction costs, increased interest rates and market uncertainty creating headwinds for new office development as well as conversion projects, Whelan said CBRE is “pretty resolute” a decline in overall product will hold in the near term.
Conversions are also likely to trail off in the future as the buildings best suited for the process are changed over.
“The conversion trend faces a few headwinds,” CBRE President of Americas Investor Leasing Mike Watts told CNBC. “The pool of ideal buildings for conversion will dwindle over time. And costs for construction labor, materials and financing remain high.”
CBRE said office rents are poised to stabilize as the market sees less supply and increasing demand.
“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,” CBRE Americas Head of Office Research Jessica Morin told CNBC.
