The U.S. office market lost 9.6 million square feet of inventory in the third quarter to conversions and redevelopment while new completions totaled just 3.5 million, according to JLL, and only 23 million square feet is under construction nationwide. For builders, office work right now means taking buildings apart far more than putting new ones up.
JLL’s third-quarter U.S. office report says inventory has fallen more than 45 million square feet from its late-2023 peak. Facilities Dive covered the figures Oct. 14 and Building Design + Construction followed Oct. 16.
The office construction pipeline sits near a low
Third-quarter deliveries matched the second quarter’s near-record low. JLL calls the 23 million square feet in progress low, without giving a trend line. Demand, meanwhile, kept improving. Net absorption was a positive 6 million square feet for the quarter, the fifth straight positive reading, and 21 million so far this year.
Rents are reacting. National asking rent rose 60 basis points from the second quarter to $40.51 a square foot. Facilities Dive’s read of the report puts effective rent growth above 20% a year for first-generation space and above 10% for second-generation. Colliers says Midtown Manhattan Class A asking rent hit $91.08, the highest since 2008.
Office conversions are where the work is
Those 9.6 million square feet are the construction story. Each removal is a demolition, a gut job or a change of use, usually to apartments. Newmark counts 176 Midwest properties totaling more than 38 million square feet that are finished, under way, proposed or being considered for conversion. Their median age at conversion is 106 years, and 70% were built before 1945. That’s old structure, old floor plates and plenty of surprises behind the plaster.
Exchange has tracked several of these jobs, including the Landmark Tower office-to-residential conversion in Saint Paul and the Santander Tower conversion in Dallas. The buyer mix is shifting, though. Through August, sales to renovation-focused buyers grew nearly 30% while conversion-focused sales slowed, per Facilities Dive. That points to more repositioning work that keeps buildings as offices, which is a different scope for MEP and interiors subs than a residential conversion.
When ground-up office comes back
Twenty percent rent growth on new space is the kind of number that makes developers re-run pro formas. It won’t turn into starts overnight. Lenders are cautious, with commercial real estate lender sentiment at a three-year low this fall, and construction costs haven’t stopped climbing.
Watch the gap between removals and completions. As long as the country takes out close to three square feet of office for every one it delivers, the shortage of top-tier space gets worse, and the case for the next round of office starts gets easier to make to a lender.