Office buildings are poised to set records for a bad reason this year: The amount of office space in the US is declining for what is likely the first time in history.
A lack of new construction and a plethora of aging office space being repurposed or destroyed will lower the amount of office space, according to Jones Lang LaSalle Inc. Less than 5 million square feet (465,000 square meters) of new offices broke ground in the US so far this year, while 14.7 million square feet has been removed, often to be converted into buildings for other uses.
That would mark the first net decline in data going back to 2000, JLL reported, adding that it’s most likely the first ever.
“We would have a lot of confidence in saying that national office inventory has never actually declined in the past,” Jacob Rowden, US office research manager for the commercial property brokerage, said in an email. “We have done some high-level estimates in the past and think that the closest we came to negative inventory historically would have been during the 1930s at the height of the Great Depression.”
While vacancy rates during the Depression likely exceeded the current 20% average in the US, there was still a lot of new construction, such as the Merchandise Mart opening in Chicago in 1930 and the Empire State Building in Manhattan in 1931, Rowden said.
Offices became the nexus of global commerce and trading with the advent of the telegraph, telephone and tickertape. Buildings grew to the sky with the invention of the elevator and steel-beam construction. But the rise of technology in recent years has allowed more individuals to work from home on laptops, chipping away at the need for big offices.
The early pandemic lockdowns exacerbated that pain, sending workers home. Now, employees have been slow to return in certain cities and office owners are grappling with a pullback in demand from tenants. Soaring borrowing costs are also squeezing many landlords, leading to more office delinquencies and falling prices. Wall Street landlords such as Blackstone Inc. and Brookfield Asset Management Ltd. have halted payments for what they regard as money-losing properties.
The glut of offices has been an opportunity for some developers to add to the US housing stock, which faces a long-term shortage. About 45,000 apartments are currently being converted from former office space, according to a report this week by RentCafe.
“The last 12 to 24 months have compounded some of the existing trends to push us to the point where negative inventory, at least for a temporary period over the medium term, is becoming highly likely,” Rowden said.