The world's largest commercial real estate services firm expects U.S. office conversions and demolitions to exceed new construction of that property type for the first time in years.
There hasn't been an inflection point in which the conversions and demolition of U.S. office space has outpaced new office construction since at least 2000, an executive with CBRE told CoStar News.
In a report scheduled for release Tuesday, CBRE said the change in activity could help lower a national vacancy rate hovering around an all-time high of 19%. The CBRE analysis of office market activity across the largest 58 U.S. markets found that 23.3 million square feet of office space is designated for demolition or conversion to other uses by the end of this year. Developers expect to complete work on 12.7 million square feet of office space in those markets this year.
"The data definitely shows an inflection point with conversions and demolitions outpacing new supply coming to the market — whether it holds in the future is the question mark," said Julie Whelan, CBRE's head of occupier research for the Americas, in an interview.
Still, CBRE is "pretty resolute this will hold in the near term with not a lot of new construction activity in the pipeline right now," Whelan said, adding that new office development is facing headwinds similar to those for conversion projects, with elevated interest rates, uncertainty in the market and higher construction costs.
The continued desire by some office tenants for high-end space is pushing obsolete offices from the market, with about 64% of the conversions underway being located in a central business district, Whelan said. She added that downtowns are evolving from business districts to mixed-use districts with retail and restaurants that can serve residents.
Buildings suited for conversion are expected to dwindle over time, the firm's executives said. Costs tied to construction labor, materials and financing remain high, with tariffs and "the economic uncertainty" weighing on big projects, the firm said.
Phil Mobley, CoStar's national director for office analytics, said conversion projects often cost more than demolition or ground-up construction. CoStar tracks projects differently than does CBRE, Mobley said, with conversion plans not being counted as underway until construction work begins.
CBRE's analysis clocks active construction projects and those on the books.
"Regardless of the data, the best way to think about conversions is that they are happening at a higher rate, but they are still quite rare as a share of inventory," Mobley said about CBRE's report. "They can be transformative within a small radius, but at the same time, they are happening to office buildings that, definitionally, were not really competitive in the office leasing market anyway."
Changing markets
The Dallas-Fort Worth region, the nation's fourth-largest metropolitan area, ranks No. 5 in the U.S. for the amount of office space in the conversion pipeline, with 4.4 million square feet, according to CBRE's new report. The region has the most central business district conversions in the United States, Whelan said.
Dallas was one of the cities on the frontier of conversions years ago when developer Todd Interests took vacant office space in projects, such as The National at 1401 Elm St., and turned it into apartments, a high-end hotel, offices, and restaurant and retail space. It also as recently as last year took an aging high-rise office tower housing a Fortune 500 firm and turned it into luxury apartments and high-end office space.
The 49-story, 1.3 million-square-foot office building once housing Energy Transfer Partners is now known as The Sinclair after a $300 million conversion, adding 293 high-end apartment units and more than 400,000 square feet of office space to the market. CBRE is marketing the office space on behalf of the developer.
The energy firm downsized its office space needs with about 95,000 square feet of office space in Dallas' Preston Center.
Markets with the most conversions
Manhattan topped CBRE's rankings for the U.S. market having the largest amount of office conversions in the works with 10.3 million square feet, followed by Washington, D.C., with 9.2 million square feet, Houston at No. 3 with 6.7 million square feet and Chicago at No. 4 with 4.8 million square feet.
Along with these cities being large office markets, initiatives such as the zoning reform program City of Yes for Housing Opportunity in Midtown Manhattan and Washington, D.C.'s Office to Anything program were noted as spurring office redevelopment. In the report, CBRE also touted Cleveland as having the highest share of its total office inventory either undergoing or planned for conversion, at 8.4%.
Office construction completions have steadily declined from prior to the onset of the pandemic that upended the office market. CBRE has tracked a decline from 51.2 million square feet in 2018 to 25 million square feet in 2024. This year, the firm expects 12.7 million square feet of new office construction.
The brokerage firm said developers have another 81 million square feet of office space in the pipeline for conversion to other uses in the coming years. Apartments are playing a dominant role in those conversion projects.
About 76% of active conversion projects are expected to make way for apartments, CBRE said, citing data as of last month. Hotels accounted for about 8% of conversions, with industrial and logistics uses housing 4% of the pipeline and life science labs trailing at 3%. About 10% of the pipeline is described as being other uses.
Since 2016, the conversions have added about 33,000 apartments and condominiums to the U.S. market, the firm said, with another 43,500 units in the project pipeline.
Jessica Morin, CBRE's Americas head of office research, one of the report's authors, said the number of residential units added to the nation's inventory from conversions won't solve the national housing shortage, but it will help, especially on a local level.
"Meanwhile, the office market will benefit as obsolete space is removed from the market in favor of the highest and best use," Morin added.