U.S. office inventory reduction, including conversions to residential use, has increased each year since the COVID-19 pandemic began in 2020. New data from the first quarter shows 2024 poised to extend that trend with more square footage taken out of the inventory in the first three months of the year than the long-run yearly average.
Nearly 9 million square feet of office space was removed in the first quarter, outpacing new supply for the first time on record and reducing the national office inventory by 1.3 million square feet, according to a report from real estate firm JLL. The level of removals is more than 1.15 million square feet larger than the yearly average going back to 1994, and a roughly 60% increase over the quarterly average of the past three years.
Driving the reduction of office space has been the multifamily sector’s better performance relative to office, a shift in capital allocation by lenders, the increasing discount on office purchases below replacement cost and governmental incentives in more than 10 major office markets designed to encourage residential conversion, according to JLL.
As the industry moves deeper into 2024, JLL expects these factors to intensify. According to the company, more cities are considering conversion incentive programs that have either been proposed or are in feasibility studies. And as the sales volume of distressed assets increases, a metric that accounted for more than half of all office sales in 2023, the discounts will enable additional conversions as developers look for larger returns in the face of higher-for-longer financing costs, JLL said.