Intelligent Investment

Limited New Supply Should Support Office Market Recovery in 2025

May 31, 2023 2 Minute Read

Fewer planned new office developments in coming years should help reduce the U.S. office market’s supply/demand imbalance since the pandemic began in 2020.

The addition of 147 million sq. ft. of new office supply amid a pandemic-induced reduction in tenant demand contributed to a 5.5 percentage point increase in the overall office vacancy rate between Q1 2020 and Q1 2023 to a 30-year-high 17.8%. During that time, occupied office space was reduced by 110 million sq. ft.

Since the start of the pandemic, the quarterly average of construction completions has increased to a historically high 11.3 million sq. ft. from the 10.7 million-sq.-ft. 20-year average. Despite tenants’ flight to quality, new buildings completed since Q1 2020 have a vacancy rate of 22.1%.

Figure 1: Historical & Baseline Forecast U.S. Office Net Absorption, Completions & Vacancy

Image of bar graph

Source: CBRE Econometric Advisors, Q1 2023.

Historically high vacancy, rising interest rates, high inflation and a tight lending market are deterring developers from breaking ground on new office projects. As projects currently under construction are delivered over the next four quarters, completions should slow dramatically by mid-2024.

CBRE Econometric Advisors predicts that average quarterly completions will fall to just 4 million sq. ft. from Q2 2024 to Q4 2028, which will reduce supply-side pressure on the vacancy rate. The demand forecast is less clear due to uncertainty about the future extent of hybrid work arrangements. This has translated into varying approaches to portfolio planning thus far, with 23% of respondents to CBRE’s Spring 2023 Occupier Sentiment Survey reporting portfolio growth and 44% portfolio contraction since the pandemic's start. More than half of respondents anticipate further portfolio rightsizing in the next three years.

The overall office vacancy rate is expected to peak at between 19.3% and 21.4% by Q3 2024. Economic and employment growth in 2025, combined with less new supply, should support the office market recovery.

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