Inventory in the U.S. office market is shrinking as the workforce moves towards flexible and multifunctional spaces.
According to a recent report published by CoStar, nearly 9 million square feet of office space was removed from the national inventory in the first quarter of 2024 alone. The data, published by JLL, marks an historic high — surpassing the total new supply for the first time ever.
This reduction is part of a persistent trend that has seen office inventory shrink consistently each year since the onset of the COVID-19 pandemic.
This sharp decrease in office space, which totals a reduction of 1.3 million square feet, is reportedly driven by the steady performance of the multifamily sector relative to traditional office use.
According to CoStar, investors and lenders are reallocating capital towards more lucrative residential conversions — encouraged by lower office property costs and significant governmental incentives.
These incentives are currently active in more than ten major U.S. cities and are designed to promote the transformation of office buildings into residential units.
The push towards residential conversions is further fueled by the increasing sales volume of distressed office assets.
According to the data, in 2023, distressed sales accounted for more than half of all office space transactions — offering substantial discounts that enable developers to achieve higher returns despite elevated financing costs.
As the industry progresses deeper into 2024, JLL anticipates that more cities will adopt or expand conversion incentive programs, which are either in the proposal stage or undergoing feasibility studies. Many former office towers could be repurposed into residential complexes as the idea seems to be taking off among landlords.
