Monday, March 4, 2024

Here's where office space inventory is actually shrinking — and what's driving the trend

 By Ashley Fahey – Editor, The National Observer: Real Estate Edition, The Business Journals

Office inventory is holding steady or shrinking in select cities across the country, due in part to an increase in conversion projects and a slowdown in new construction.

That's according to a recent analysis found office inventory shrank in seven metro areas tracked by the commercial real estate firm. Those markets are Washington, D.C., as well as the adjacent northern Virginia and suburban Maryland markets; New York; Phoenix; Orange County, California; and Baltimore, which saw its inventory shrink the most, by 3.2%.

The analysis examined office inventory between the fourth quarter of 2022 and the final three-month period of 2023.

Notably, though, more metro areas examined by Savills posted gains in office inventory, led by Salt Lake City and Austin, Texas, which posted 4% and 3.7% gains in office space, respectively, on a yearly basis. The Dallas-Fort Worth metro area and Seattle-Puget Sound followed, at 3.6% and 2.8%, respectively.

San Diego and Philadelphia saw their inventory remain unchanged year over year.

United States has been oversupplied on office space since even before the Covid-19 pandemic. Most markets seeing their inventory grow have projects that broke ground two or three years ago that delivered in 2023.

"Now there are redevelopment pressures in these markets to finally deal with some of the office stock that has long-term office vacancy."

The conversion of office space into a new uses — primarily residential — has become a hot topic of discussion as reduced office-use patterns become permanent, office buildings with high vacancy see their values decline, and massive loans those properties back reach maturity. Developers in some metro areas, including D.C., have completed conversions successfully for a long time and also have an abundant supply of buildings considered ideal for such conversions. Other cities that have seen little to no conversions historically are starting to develop policies and incentives around conversions.

Despite that uptick in conversion activity shrinking office inventory in a few places, most of the office markets analyzed by Savills are still considered oversupplied. The firm examined average square feet per office-using worker and average utilization levels nationally, determining 151 square feet per employee to be a national baseline.

Based on that, only three markets — Nashville, Tennessee; south Florida and Tampa-St. Petersburg, Florida — were considered undersupplied at the end of 2023. Boston, New York, and Raleigh-Durham, North Carolina, ranked as the most oversupplied.

Sublease space dips for first time in two years

For the first time since the fourth quarter of 2021, sublease inventory shrank nationally at the end of 2023.

It went from 176.4 million square feet in Q3 2023 among markets tracked by the firm to 173.7 million square feet in Q4. Still, compared to 127.5 million square feet of sublease space on the market in Q4 2020, that market overall has continued to grow since the pandemic.

It was surprising to see sublease space decrease nationally at the end of 2023 but, he added, there were some high-profile subleases around the country in which the lease term expired, which meant that space turned into direct vacancy.

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