US Office Market Recovers as Conversions Exceed New Construction

Updated June ⁣02, 2025

The⁣ U.S. office market is showing signs of recovery after years of distress.For the first time in at least 25 years, office space is shrinking as conversions ⁣and demolitions outpace new construction, according to CBRE Group. This shift may lower vacancy⁢ rates in‍ major markets, benefiting building owners.

CBRE reports that 23.3⁤ million square feet of office space across the 58 largest U.S. markets are slated for demolition or conversion by yearS end.This contrasts with the projected ⁢completion of only 12.7 million square feet of new office construction in those same markets.

Mike Watts, CBRE Americas president of investor leasing, said the net reduction of office space will likely contribute to lowering vacancy rates.Office vacancies soared to a record high of around 19% due to the rise in remote work as the pandemic.

However, the market is beginning to rebound. More companies are requiring employees to⁤ return‍ to the office, and a tighter job market is giving workers fewer options to resist in-person attendance. Net absorption, the measure of occupied space versus vacated space, has been positive for the last four quarters. Office-leasing activity increased 18% in the first quarter of this year compared to last year.

With reduced supply and rising demand,office rents ‍ shoudl stabilize. Prime office locations and‍ class A spaces have already seen rent recovery, benefiting major office REITs such as Vornado, BXP, Alexandria Real Estate Equities, and SL Green.

⁣ “The office market will benefit as obsolete⁣ space is removed from the market in favor of ⁤the highest and ⁣best ‍use. Additionally, conversions will⁣ boost the vibrancy of neighborhoods within various markets,” said Jessica Morin, CBRE Americas ‍head ⁢of office research.

Developers are preparing another 85 million square feet of office space for conversion ⁢in the coming years. As 2016, office conversions to multifamily residences have created approximately 33,000 apartments and condominiums, averaging about 170 units per‍ conversion. An additional 43,500 units are in the conversion pipeline.

What’s next

While the reduction in⁢ overall office space is a positive sign for commercial real estate, progress ⁤will be gradual. Watts noted that the availability of ideal conversion buildings will decrease over time, and high costs for construction labor, ⁤materials, and financing remain challenges.