CBRE Reports Office Conversions, Demolitions Will Exceed New Construction in 2025–Aiding Office Market Recovery

(Illustration courtesy of CBRE)

More office space will be removed from the U.S. market this year than added to it for the first time since at least 2018, which indicates the market is stabilizing, according to CBRE, Dallas.

CBRE analyzed office market activity across the 58 largest U.S. markets and found that 23.3 million square feet of space is slated for demolition or conversion to other uses by the end of this year. In comparison, developers are projected to complete 12.7 million square feet of office space in those markets this year.

The crossing of these trends has been years in the making, CBRE’s report noted. Construction completions have steadily declined from 51.2 million square feet in 2018 to 25 million last year and the anticipated 12.7 million square feet this year. Meanwhile, conversions alone – factoring out demolition – have increased from 5.5 million square feet in 2018 to an anticipated 12.8 million square feet this year.

CBRE has tracked office conversions and demolitions since 2018. It noted construction completions “handily exceeded” conversions and demolitions in each year until 2025. (Completions likely exceeded conversions and demolitions prior to 2018, given that office construction was robust and conversion activity minimal in past decades.)

“Various other indicators depict a U.S. office market that’s slowly turning the corner,” CBRE said in the report. “Net absorption–the amount of space newly occupied in a quarter versus the amount newly vacated–has been positive for the past four quarters after six straight quarters of negative absorption. Office-leasing activity increased 18% in the first quarter from a year prior. Still, the national vacancy rate continues to hover around its all-time high of 19%.”

Developers currently have another 81 million square feet of office space in the pipeline for conversion to other uses in the coming years, the report said.

“This net reduction–albeit slight–of office space across major markets likely will contribute to lowering the vacancy rate in the quarters ahead, which would benefit building owners,” said Mike Watts, CBRE Americas president of investor leasing.

But watts noted the conversion trend faces a few headwinds. “The pool of ideal buildings for conversion will dwindle over time,” he said. “And costs for construction labor, materials and financing remain high.”