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One of the biggest questions hovering over the challenged office market has been: Just how much space is never going to be leased as an office again?
In a new report released this week, commercial real estate services giant Cushman & Wakefield estimates that number will be roughly 330M SF by the end of the decade.
There will be more than 1.1B SF of vacant office space in the U.S. by the end of the decade, C&W researchers estimate, nearly a third of which they categorize as “excess vacancy" as a result of remote and hybrid work shifts. As a result, the national vacancy rate is expected to be 55% higher than it was in 2019.
Presently, trouble in the market is concentrated: Buildings with vacancy rates of 50% and higher made up 7.5% of the total inventory in the U.S., according to C&W. If those buildings were removed from the market, the national office vacancy rate would fall from 18.2% to 12%.
But by 2030, as much as 25% of all U.S. offices — roughly 1.4B SF — is “growing increasingly undesirable and will need to be reimagined and made relevant for the future,” the report found. It called these buildings "functionally obsolete."
Cushman & Wakefield classifies roughly 60% of all office stock as “facing competitive obsolescence.” To survive, the brokerage said, the owners of this collective 3.4B SF of office space will need to make significant investments into their properties.
The brokerage expects to see office vacancies continue to rise over the course of the decade. Just one-third of leases due to expire by the end of 2029 have expired, leaving further to fall for the office leasing market across the country.
Employers across the country are increasingly mandating more strict hybrid work policies, with Amazon recently setting a requirement of three days of in-person work per week for office workers.
But that hasn't stopped them from reducing their office footprint. The average office lease renewal or extension transaction was 28.7% smaller in 2022 than in 2019, according to a Trepp/Compstak study released this week.
Signs of trouble are already apparent among transactions in the office sector, with major markets across the country seeing a rise in subleasing, downsizing, difficulty refinancing and potential conversions. There are also increasing instances of sophisticated office owners like Brookfield, Blackstone and Related Cos. handing the keys of underperforming properties over to their lenders.
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