A new report from Cushman & Wakefield, entitled Obsolescence Equals Opportunity, projects that by 2030 US office inventory will total nearly 5.7B SF—but a flexible, hybrid workforce will only require about 4.6B SF of space.
As a result of what C&W is calling “an impending demand-supply balance,” the remaining 1.1B will be vacant at the end of the decade, as office worker “density” declines from the pre-pandemic metric of 190 SF per employee to 165 SF over the next eight years.
Only about a third of the leases scheduled to expire in this decade have come due since 2020, but renewals and extensions are trending sharply in the direction of reduced office footprints compared to pre-pandemic averages.
The average office lease renewal or extension transaction was nearly 30% smaller in 2022 than in 2019, according to a Trepp/Compstak study released last week.
C&W’s report projects that by the end of the decade, office vacancies will be 55% higher than pre-pandemic levels.
“Overlaying current inventory, projected deliveries and a natural rate of vacancy of 13%, the US market is on track to have 1.1B SF of vacant office space by the end of the decade, 55% more than prior to the pandemic (Q4 2019),” the report from the brokerage said.
C&W is projecting that more than a third of the vacant office space in 2030, about 330M SF, will be what the report calls “excess space.”
The brokerage said the imbalance in demand is characterized by the post-pandemic flight to quality in newer Class A buildings packed with amenities, as well as a corresponding drop in interest in older office inventory, the report said.
“This imbalance in demand is further exacerbated by the supply side, where upwards of 70% of the nation’s office stock was built prior to 1990 and does not match the preferences of today’s occupiers,” C&W said. “Further, as leases expire, the office product that has not adapted to changing demand is at risk of competitive obsolescence.”
According to the report, newly built office buildings offering “trophy building experiences” have registered more than 100M SF of positive absorption since 2020.
However, only 15% of inventory in 2030 is expected to be new Class A supply, based on current projections, C&W says; about 60% will require “some form of upgrade or repurposing to overcome competitive obsolescence;” and the remaining 25% will be ”increasingly undesirable” and “will need to be reimagined and made relevant for the future.”
“Softness in the market will not be equally distributed. Currently, buildings with greater than 50% vacancy comprise 7.5% of total inventory,” C&W’s report noted.