Office demolitions and conversions have been talked about a lot since the Covid-19 pandemic, but it seems like they’re finally coming to fruition in many places.
At least 20% of San Mateo, California’s office inventory is functionally obsolete and likely headed for demolition or conversion, a CBRE executive recently told Doug Sams at the San Francisco Business Times. Many of the office buildings going away are being replaced by much-needed housing.
US office-vacancy rate hits new high in Q2
The national office-vacancy rate hit a new record high in the second quarter, the latest mark in a pattern of rising vacancy that was widely expected heading into 2025.
The U.S. office-vacancy rate was 20.6% in Q2, according to Moody’s Analytics’ preliminary data for the quarter. It’s the sixth time a new vacancy record has been set in the post-pandemic office market, and it could continue to tick higher this year as longer leases predating 2020 expire and companies continue to prioritize smaller, highly amenitized office real estate.
Nick Luettke, associate economist at Moody’s, told me the expectation is that the vacancy rate will continue to rise in 2025 and could peak in early 2026, but much depends on the labor market.
“There’s a potential for the vacancy rate to continue climbing, if the labor market sours,” he said. “If companies are unsure of the direction of the economy, it might affect their decisions.”
Leasing activity also dampened somewhat in Q2, with positive net absorption recorded in only a couple of markets tracked by Moody’s.
Office markets see mixed outcomes in Q2
We’re starting to get a peek at how various local office markets performed in the second quarter — because, as we all know, real estate is local.
Boston: In the second quarter, the city had a 21.1% vacancy rate, slightly lower than the 22.9% rate for the overall metro area, reports Grant Welker at the Boston Business Journal.
Boston has had a couple of recent wins, too, including Lego’s U.S. headquarters move to the city from Connecticut and marketing technology company Klaviyo’s expansion.
“Companies aren’t bloodletting space like they used to,” said Bryan Montgomery, a researcher at JLL.
Chicago: Office availability reached 29.9% in Q2 in downtown — up from 29.3% during the same time a year ago but unchanged from Q1, reports Alex Zorn at the Chicago Business Journal. But Class A availability in downtown Chicago actually declined slightly from the first quarter.
Baltimore: The vacancy rate in the city’s central business district hit a new record high in the second quarter, at 28%, reports Melody Simmons at the Baltimore Business Journal.
“The big news is that we see a little bit of a flatline with regard to downtown Baltimore’s vacancy rate and absorption rate,” Robert Manekin, markets managing director in JLL’s Baltimore office, told Simmons. “We don’t see it getting better or significantly worse, and there are still things going on that will help in the long run.”
Northern Virginia: The office-vacancy rate in Tysons, Virginia, is now at 26% — not quite as high as in nearby Herndon, at 29.8%, but still much higher than the 19.3% Tysons posted in the first quarter of 2020, reports Dan Brendel at the Washington Business Journal. But net absorption in the market turned positive in Q2, a rare occurrence for many regions since the Covid-19 pandemic.
Dearth of office construction has implications
We all know why office space isn’t being built right now — but that lack of new construction will have ripple effects for myriad markets for years to come.
No new office buildings will deliver in North Carolina’s Research Triangle Park region until at least 2029, reports Kayli Thompson at the Triangle Business Journal, citing JLL research. That’s because no new office buildings are underway in that region right now — so the earliest a new tower could break ground would be in 2026, and given most new towers take three years to be built, a new tower likely wouldn’t deliver until 2029.
There’s still a decent amount of Class A office availability in the Raleigh market — but for how long?
In order to break ground on a new office tower in the Raleigh-Durham metro, developers would need to list rental rates at 28% higher than the current top-tier asking rents, according to JLL.
“That’s the other thing these lenders are grappling with is even if they believe the demand is there and the market’s getting healthier, there’s not data to support that somebody today is going to sign up for a rate at that level,” said JLL Managing Director Kimarie Ankenbrand. “Lenders need to see the market get a little healthier, and they need to see more data to support being willing to capitalize a new office building. And we’re not quite there yet.”
Elsewhere: There are at least 33 companies scouring the Northern Virginia office market for 50,000 square feet or more, but the only new office building is a 35,000-square-foot boutique project underway now, reports Michael Neibauer at the Washington Business Journal. In suburban Maryland, no new office space has been under construction since the third quarter of 2023.
Three big numbers
- $500M: The estimated value loss of Amazon‘s Seattle properties last year
- $31B-plus: The total announced new investment by companies across Arizona in the fiscal year that ended June 30
- 47%: The average amount by which Bernalillo County, New Mexico, non-residential property assessments increased this year
Source: “The National Observer: Real Estate: Office Vacancy Continues to Rise Nationally”