By Peter Grant | The Wall Street Journal
America has a glut of office buildings. That longstanding surplus is finally shrinking.
The number of property demolitions and the pace of office conversions into residential buildings are accelerating. Developers, meanwhile, have greatly slowed new office construction because of questions about future tenant demand.
As a result, the amount of office supply in the U.S. is on pace this year to contract for the first time in a quarter of a century, according to real-estate-services firm CBRE Group.
If this trend holds, it would reverse a decades long office-construction spree that flooded the U.S. with too much unwanted workspace. Developers—lured by federal tax breaks, low interest rates and inflated demand from unprofitable startups—built more office towers than cities needed. The rise of remote work during the pandemic aggravated this excess supply, causing office-vacancy rates to rise to record highs and building values to plummet.
Conversions of office space into apartments held an obvious appeal. But the cost of acquiring an office building and addressing structural obstacles made these conversions too expensive to work in most cases.
Analysts had expected the office glut to take many years to shrink, not unlike the decade-plus it took for many U.S. cities to work off their excess of retail properties after e-commerce ascended.
Now, the pace of office conversions is picking up, thanks to the rapidly falling prices of obsolete office buildings, changes to zoning rules that allow for more residential construction, and government incentives that help bring down costs. At the same time, more companies are summoning their employees back to the office after years of tolerating remote work, sparking new demand for workspace.
The acceleration of office conversions won’t sharply reduce the overall supply of office buildings any time soon. But conversions are already starting to benefit neighborhoods where they take place. By bringing in new residents, these projects are restoring street life, shopping and entertainment venues where obsolete office buildings used to stand.
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