Teardowns Nudge Office Vacancy Down, But Demand Is Stalling

For the second time since 2008, developers either converted or tore down more office buildings than they added to the U.S. market.

The net result helped push down the overall vacancy rate, but demand remained anemic in the first quarter as companies wrestled with economic uncertainty and the unclear impacts artificial intelligence will have on the job market.

U.S. office tenants absorbed 2.9M SF in the first quarter, down from 9.5M SF in the fourth quarter, according to the NAIOP Research Foundation's second-quarter office space demand forecast.

Yet the vacancy rate fell by a modest 10 basis points from the third quarter to 11.8% as conversions and demolitions outpaced deliveries by 3M SF in Q1. 

This follows a CBRE report that showed plans to raze 23M SF in 58 major U.S. office markets last year, versus 13M SF of new construction.

NAIOP’s report authors, Manhattan University O’Malley School of Business Dean Hany Guirguis and Fordham University Real Estate Institute Executive Director Joshua Harris, project that the slowdown in economic growth and job creation will translate into 31.2M SF of absorption for the remainder of 2026 and then fall to just over 30M SF for all of next year.

The authors see a 22.5% chance of a recession, which would lower that number further.

Inflation is taking a bite out of consumers’ wallets, and the potential impact AI productivity will have on the need for human workers raises concerns about future office demand, according to NAIOP. 

“This divergence between continued consumer spending and deeply pessimistic sentiment adds uncertainty to the outlook and complicates assessments of how economic conditions may translate into business investment and demand for office space in the coming quarters,” the report says.

In the near term, AI impacts will likely feed demand for office lease flexibility and help the coworking industry and move-in-ready office spaces, Yardi Research Director Peter Kolaczynski said in a May CommercialCafe report. Kolaczynski projected that new office completions were likely to bottom in 2027 to just under 30M SF, with only small incremental increases through 2030.

“If adoption of AI expands and prolonged unemployment becomes an increasing likelihood, new office space supply will remain limited as new projects will be difficult to justify,” he said in the report. 

Despite AI job anxiety, Cushman & Wakefield earlier this month proposed a scenario it called “likely” in which AI generates global office demand of 330M SF in the next 10 years. It projected a 50% probability that AI-driven productivity gains lead to more office space demand, pushing pre-AI forecast demand of 2.7B SF to more than 3B SF through 2035, an increase that would ripple to more need for apartments and retail.

“AI will be disruptive, and there will be some displacement, but it will also create new businesses, which we are already seeing in the data,” Cushman & Wakefield Chief Economist Kevin Thorpe said in the report.

“Ultimately, AI is an additive to real estate demand. Productivity gains don’t shrink the economy; they expand it. Companies produce more at lower cost, margins improve, wages rise, and that broader growth flows through to space demand across every sector.”