Snapshots

A shortage of new construction is forming as groundbreakings slow

July 25, 2023

Contributors:

A record volume of office conversions and new development slowing to the lowest level in decades has begun to impact supply outlook and will drive the first declines to national office inventory on record in coming years.

From 1995-2019, an average of 6.0 million s.f. of office inventory was removed for demolition, conversion or redevelopment. Pressure on office valuations and new incentives from major cities led to record conversion volume in both 2021 and 2022, with 2023 on pace to again set new all-time highs.

Although over 20 million s.f. of office was removed from inventory in 2022, persisting development activity in the first half of 2022 was enough to drive over 25 million s.f. of groundbreakings over the course of the year to balance inventory removals. In 2023, high financing costs have sharply impacted new construction, and under 5 million s.f. has broken ground year-to-date while 14.7 million s.f. has been removed, predominantly for conversion.

The average office development takes 2.5 to 3.5 years from groundbreaking to completion, meaning that the impacts of the current construction slowdown will begin to intensify from 2025-2027, but overall office inventory in the U.S. may peak and decline slightly earlier.

Intense demand for high-end space during the pandemic has driven a massive migration of tenants into top-tier product from lesser quality buildings, which drove sustained rent growth during the pandemic, even leading to record rental rates executed in most markets over the past three years. As supply in that segment of the market becomes increasingly scarce while leasing volume improves, the bifurcation of performance for high-quality offices is likely to intensify, and demand will necessarily spill over into lower quality tiers as supply tightens.

Sublease inventory continues to stabilize

Sublease inventory stabilizing

Law firm leasing is exceeding pre-pandemic levels

Positive leasing momentum in recent quarters has driven gross U.S. office leasing activity to 75% of pre-pandemic levels.

Conversions are helping offset the rise in vacancy

Conversions are mitigating the rise in vacancy