Dive Brief:
- Office space vacancy in the U.S. is at its highest level since 1979, driving billions of dollars in lost annual rent across major markets, according to a report from Switch On Business, a platform that provides resources for entrepreneurs and business owners.
- New York City faces losses of about $7.6 billion in annual rental income due to vacant offices, followed by Los Angeles, San Francisco and San Jose, which each lost at least $2 billion in annual rent, according to Switch On Business. In terms of vacant office space, New York City topped the list at 105.8 million square feet, followed by Chicago at 58.1 million square feet, its report says.
- Despite Chicago and other cities’ efforts to convert vacant office spaces to residential units, this process is difficult due to restrictive zoning, budget impediments and building designs that often leave areas with no access to natural daylight — a factor that also makes these offices less appealing for organizations and employees returning to work, Switch On Business says.
Dive Insight:
The commercial real estate market has taken a sharp hit post-pandemic, as businesses adjust to remote and hybrid workplace models. Approximately 24% of U.S. office space is expected to be vacant by early 2026, according to projections by Moody’s released in June. The national office vacancy rate stood at 17.7% at the end of the third quarter, up 90 basis points year over year and 10 basis points more than the previous quarter, according to a Colliers report released Oct. 21. Leasing activity has seen an uptick due to the Federal Reserve’s interest rate cut in September, according to JLL’s U.S. office market dynamics report released this month.
However, the overall market continues to struggle with the effects of remote and hybrid work, which have contributed to an oversupply of office space “created by decades of over-building”, Switch On Business says. Using data from Cushman & Wakefield, its analysis involved comparing total office space inventory with vacancy rates across the U.S. to calculate the total square footage of empty office space, and multiplying those figures by the rental cost to calculate the value lost in each city.
The annual rental income losses San Francisco, San Jose and Los Angeles are facing “fail to match the enormity of New York’s shortfall,” even when combined, Switch On Business’ report says. Los Angeles and San Jose also rank in the top ten when measured by floor space, but when combined, still fall short of New York City’s 105.8 million square feet of empty offices, according to the report.
In light on the ongoing housing crisis, underused commercial properties present significant opportunities for adaptation to address current needs, but require more state-level legislative support for conversions, Brooke Miller, San Diego-based special counsel in the real estate, land use, natural resources and environmental practice group at law firm Sheppard, Mullin, Richter & Hampton, said in a blog post Oct. 14.
A California bill, AB 3068, aimed at streamlining the approval process for conversions of certain buildings, was vetoed by Gov. Gavin Newsom in September. Local leaders attributed that move to concerns over too many conditions in the bill. However, another California bill AB 529, approved last year, has the potential to address some of the permitting and code compliance issues raised in AB 3068, Bruce Monighan, urban designer manager for Sacramento, California, previously told Facilities Dive.
Other cities, including Denver, Minneapolis and Seattle, are seeing potential in new alternatives, like affordable co-living units, and policies that aim to ease conversion approvals, according to an analysis conducted by Gensler and The Pew Charitable Trusts.
In Denver, a ballot initiative this fall targets an expansion of Denver Downtown Development Authority’s boundary in a development that is expected to generate $500 million for reinvestments in the downtown area, their analysis notes.
In Minneapolis, an ordinance aimed at spurring conversions of existing downtown office buildings was approved by the mayor in September. Proposed updates include accelerating review process timelines, eliminating the need for public hearings and removing the requirement for conversions to be subject to inclusionary zoning requirements of the city’s Unified Housing Policy, Gensler’s report states.
In Seattle’s downtown zoning area boundary, which houses roughly 198 office buildings over 50,000 square feet spanning 57 million square feet, an estimated 129 office buildings are at least 30% vacant, the analysis by Pew and Gensler says. This provides an opportunity for adaptive reuse projects that can meet the demand for affordable housing, their report states. It suggests that policy shifts and regulatory support, such as zoning reforms, streamlined approval processes and financial incentives like tax breaks, could further incentivize developers to undertake conversion projects.
