The U.S. office market could be saddled with 330 million square feet of obsolete space by the end of the decade that would need to be repositioned lest vacancy rates rise to undesirable levels, according to a new analysis by Cushman & Wakefield.
The real estate services giant projects much of that property — the equivalent of all the office space in Atlanta, the nation's eighth-largest office market — is ill-suited to meet the demands of hybrid working and environmental priorities.
"We want to sound the alert right now that there are opportunities here in the sector and for property owners to think about if the space they are in now is the space they want to be in long term," said David Smith, global head of occupier insights for Cushman & Wakefield. "If not, they can focus on the value play or if they want to upgrade their space into what occupiers really want to work in." David Smith is the global head of occupier services for Cushman & Wakefield. (Cushman & Wakefield)
About 70% of the nation's office buildings were developed before 1990 and don't meet the demands of tenants today, the firm found in its analysis, with more tenants seeking higher quality space as leases expire and companies seek to entice workers back to the office. As companies trade up to higher-quality office buildings, they also tend to get more efficient with their footprint, leaving more empty space, he said.
Unused office space is highly concentrated in the United States, with more than 50% of office vacancy being located in only about 7% of office markets in the nation, highlighting how the flight to quality is affecting older buildings, according to Cushman & Wakefield.
In the next year or so, Smith said, office vacancy is projected to rise before coming down slowly through 2030. At that rate, the office market would have a vacancy rate of 18% — mirroring where it is today — by the end of the decade, surpassing what is estimated to be a healthy vacancy rate of 13%, Smith said. Those five percentage points into unhealthy vacancy territory represents about 330 million square feet of office space, Smith said.
"Real estate and office move relatively slowly and there are a lot of narratives, but [the narratives] really fall into two extremes," Smith said in an interview with CoStar News. "The first one is 'there's nothing to see here' and the other extreme is that we've gone from roughly 13% vacancy to 18% vacancy, and we are on our way to 25% or 30% vacancy, which is a 'sky is falling' perspective. We dug into the data and neither one is true."