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Office Space Reduction Sets Record Pace in First Quarter, JLL Says


Office space

Since the onset of the COVID-19 pandemic in 2020, the landscape of the U.S. office market has been undergoing a profound transformation, marked by a significant reduction in office inventory. New data from the first quarter of 2024 indicates that this trend is poised to continue, with more square footage taken out of the inventory than the long-run yearly average.


According to a report from real estate firm JLL, nearly 90 million square feet of office space was removed in the first quarter alone, outpacing new supply for the first time on record. This has resulted in a reduction of the national office inventory by 1.3 million square feet. Such a level of removals surpasses the yearly average going back to 1994 by more than 11.5 million square feet, marking a roughly 60% increase over the quarterly average of the past three years.


graph of office inventory removals

Several factors are driving this reduction in office space. First and foremost is the outperformance of the multifamily sector relative to office properties. With the rise of remote work and shifting tenant preferences, demand for residential properties has surged, while office demand has softened. This trend has led to lenders shifting capital allocation, favoring residential projects over office developments.


Furthermore, there has been an increasing discount on office purchases below replacement cost, making it more financially attractive for developers to convert office buildings into residential properties. In more than 10 major office markets, governmental incentives have been introduced to encourage such conversions, further accelerating the trend.


As the industry progresses into 2024, JLL expects these factors to intensify. More cities are considering conversion incentive programs, with several proposed or in feasibility studies. Additionally, as the sales volume of distressed office assets increases, driven by economic uncertainties and changing market dynamics, developers are finding opportunities to acquire office properties at discounted prices. This trend is expected to continue, especially as financing costs remain elevated, prompting developers to seek higher returns through residential conversions.


JLL notes that distressed asset sales accounted for more than half of all office sales in 2023, indicating a significant shift in the market landscape. The discounts associated with these distressed assets enable developers to pursue larger returns, further incentivizing the conversion of office buildings into residential spaces.

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