Office Vacancy Rates Remain High, Yet Conversions Signal Recovery

The office market continues to grapple with high vacancy rates, currently nearing 19%, but signs of stabilization are emerging. According to Julie Whelan, the global head of occupier research at CBRE, a leading commercial real estate services firm, the market is beginning to find its footing. “The word that we’re using is stabilization,” Whelan stated. “We really do feel like we have stabilized as a market, and now we can begin to lay the road to recovery.”

CBRE’s recent analysis highlights a growing trend of office conversions as older buildings are repurposed into residential units, hotels, and industrial spaces. This year, 66 office conversions are projected to be completed, a significant increase from the average of 40 per year prior to the pandemic. Currently, there are 99 million square feet of office space—approximately 2.4% of the total U.S. supply—undergoing or planned for conversion, an increase from 81 million square feet in the second quarter of 2023.

Despite these conversions, the national office vacancy rate remains elevated compared to 12% before the pandemic. Office conversions, while a small aspect of the market’s overall shift, play a crucial role in revitalizing their surroundings and can attract further investment.

A notable decrease in new office construction has also been observed, with the current construction pipeline down 87% from the peak levels seen in early 2020. Whelan noted that this reduction in construction reflects a cautious approach from developers amid changing demand.

Demand for office space is gradually recovering. Businesses have shifted from shedding space to a more balanced approach, with CBRE documenting six consecutive quarters of positive net absorption. More companies are now moving into office spaces than exiting, indicating a renewed confidence in the market. “Occupiers have learned to continue moving forward, making decisions even without great clarity,” Whelan explained.

Companies are adapting to a hybrid working model, with many employees spending an average of 2.9 days in the office per week. In contrast, organizations surveyed by CBRE expressed a preference for employees to be in the office an average of 3.2 days weekly. This shift in workplace dynamics is increasingly accepted across generations; according to a recent Gallup report, more than half of American workers in remote-capable jobs are now working in a hybrid arrangement, up from 32% before the pandemic.

Employers and employees appear to be aligning better on hybrid work strategies, with 72% of office-using companies achieving their attendance goals, a notable increase from 61% a year ago.

The health of the office market varies significantly by location. Whelan pointed out that certain downtown markets, like New York, which experienced severe impacts at the pandemic’s onset, have since rebounded robustly. Conversely, older office buildings in less desirable neighborhoods face greater challenges with high vacancy rates, while newer constructions near good transportation options are performing better.

As the market continues to evolve, the focus remains on adapting to new demands and revitalizing urban spaces. The ongoing transformations in the office sector may well set the stage for a more resilient and balanced future.