U.S. offices are closer to recovery than at any time since the pandemic began

Much has been made about the state of the US office market since the pandemic sparked a remote work revolution, but a pair of new reports indicate the sector could be on the brink of a turnaround.

Net absorption in the US office sector was higher last quarter and interest in conversion projects remains strong.

Net take-up was positive for the first time in two years and asking rents have risen modestly nationally, research shows Colliers’ third quarter US office reportstating that the US office “appears to be closer to recovery than at any other point post-COVID.”

Meanwhile, a CBRE report suggests that the country’s cities are increasingly taking into account aging office buildings; 73 renovation projects have already been completed and another 30 are expected to be completed by the end of the year.

“Growing leasing volumes and tenant demand in most major markets are starting to have a positive impact on fundamentals.” Necklaces said in his report. “Sentiment among property owners and tenants is largely positive, with the outlook for the next twelve months showing an upward trend.”

According to Colliers, approximately 800,000 SF of office space was absorbed in the third quarter. That was a big shift from the same period in 2023, when tenants left 16.4 million SF more than they rented. Asking rents increased by just under 1% from $36.76 to $37.09 per SF during the same period. The average rental price was 0.6% higher than in the second quarter.

The report also says that sublease availability has fallen for the fifth consecutive quarter and is now down to 220 million SF nationally. Fewer large blocks are dumped on the market, which limits the oversupply.

The national vacancy rate is 17.6%, but Colliers has found a high degree of regional variability. Markets like Savannah, Georgia, Santa Fe, New Mexico and those in states like Idaho are all well below 5%, while in San Francisco, Chicago and Houston interest rates are between 25% and 30%.

There is overlap between the markets that Colliers has identified as experiencing high vacancy rates and where CBRE found the most office conversion activities.

Houston has 5.9 million SF of renovations planned or underway, representing approximately 3% of the area’s office inventory. The figure stands at 4.8 million SF in Chicago, which represents just under 2% of the city’s office inventory.

On the San Francisco Peninsula, 1.2 million SF of office conversions are planned or underway, representing approximately 3% of the region’s office stock. But San Francisco is bucking one trend: 74% of office conversion projects nationwide will convert offices to multifamily, but none of San Francisco’s conversion projects involve apartments.

CBRE’s report doesn’t specify what will happen to those Bay Area properties, but nationally, 8% of office conversions will be hotels, 6% life sciences spaces and 4% industrial.

The 103 conversion projects due to be completed by 2025 represent the highest number CBRE has seen since it started tracking office conversions in 2016.

In the third quarter, 71 million SF, or 1.7% of the national office stock, was undergoing conversion or was about to be converted. These are the same figures as in the first quarter, meaning the pipeline is replenishing itself, according to CBRE’s analysis.

The company expects office renovation activity to skyrocket by 2025. It turned out that 185 renovations are planned or announced for next year. Another 94 projects are underway and will be completed by 2025.

Low office building valuations have made adaptive reuse more accessible to developers considering conversion projects, and “the pipeline of office conversions is expected to grow as cities provide more incentives and sellers of problem assets further reduce prices, especially for older buildings,” according to CBRE.

This summer PMC Property Group purchased the Three Parkway office tower in Philadelphia for $30 million. That was only 26% of the building’s previous assessed value. PMC planned to convert half of the largely vacant building into 175 residential units.

New York State’s $237 billion budget deal completed earlier this year includes a tax incentive for the conversion of offices to multi-family homes. More than half of Manhattan’s office buildings would be good candidates for home conversionaccording to the CommercialEdge conversion feasibility index.

But elsewhere the prospects are not so rosy. CommercialEdge found that only 1 in 6 office buildings nationwide would be good candidates for residential conversion.