Office vacancy rates in the United States remain elevated, but new data suggests that the market is stabilizing. According to Julie Whelan, global head of occupier research at CBRE, a leading commercial real estate services firm, the industry is beginning to see a balance between supply and demand, paving the way for recovery. Whelan stated, “The word that we’re using is stabilization. We really do feel like we have stabilized as a market, and now we can begin to lay the road to recovery.”
CBRE’s latest analysis indicates a significant increase in the number of office conversions. These conversions transform old office buildings into residential units, hotels, industrial spaces, and more. With 66 office conversions expected to be completed in 2023, this marks a notable rise from an average of around 40 per year prior to the pandemic. Currently, there are 99 million square feet of office space, which accounts for 2.4% of the total U.S. office supply, undergoing or planned for conversion, up from 81 million square feet in the second quarter of 2023.
Despite the positive trend in conversions, the national office vacancy rate stands at nearly 19%, a significant increase from 12% before the pandemic. While office conversions contribute to revitalizing urban areas, they represent only a fraction of the overall market adjustment. The slowdown in new office construction is notable, with the construction pipeline currently 87% below its peak in early 2020, according to Whelan.
Demand for office space is gradually rising, reflecting a shift in business strategies. Companies are no longer aggressively reducing their square footage. CBRE has tracked six consecutive quarters of positive net absorption, indicating that more businesses are moving into office spaces than vacating them. Whelan noted, “Occupiers have learned to continue moving forward, making decisions even without great clarity.”
Hybrid work models are now more entrenched within corporate culture. Companies surveyed by CBRE expressed a desire for employees to spend an average of 3.2 days in the office weekly, while actual attendance averages around 2.9 days. A recent report from Gallup highlighted that more than half of American workers in remote-capable jobs are now working in hybrid arrangements, a significant increase from 32% before the pandemic. Additionally, 26% of these workers are exclusively remote, and 22% are fully on-site.
Employers and employees are increasingly aligned on hybrid work expectations. CBRE reports that 72% of office-using companies are meeting their attendance goals, up from 61% just a year ago.
The health of the office market varies significantly by location. Whelan pointed out that certain downtown areas, such as parts of New York, have fully recovered from the pandemic’s impact. In contrast, older office buildings located in less desirable neighborhoods face greater challenges with vacancy rates. Newer, upgraded buildings in areas with good transportation access are performing better.
As the market continues to stabilize, the trend of converting outdated office spaces into functional properties is likely to play a crucial role in revitalizing urban environments and stimulating further investments in the commercial real estate sector.
