Obsolescence Equals Opportunity_final (002)

The U.S. office sector is facing an unprecedented imbalance in supply and demand—one that will result in an excess of 330 million square feet (msf) of vacant space by the end of the decade brought on by the impacts of the hybrid work environment.

Demand for office product that can accommodate modern-era tenant preferences and sustainability features, and provide a high-quality, strong in person experience has shifted dramatically higher, while demand for mediocre, lower-quality, older commodity office product has shifted dramatically lower. This imbalance in demand is further exacerbated by the supply side, where upwards of 70% of the nation’s office stock was built prior to 1990 and does not match the preferences of today’s occupiers. 1 Further, as leases expire, the office product that has not adapted to changing demand is at risk of competitive obsolescence. These shifting demand dynamics have accelerated the bifurcation between the office building that works for today’s economy and the office building that doesn’t work. The data bears this out and demonstrates the degree to which vacancy is highly concentrated: buildings with more than 50% vacancy make up just over 7% of total inventory in the United States today. In other words, if this portion of high-vacancy buildings were to be removed from the total inventory, then the office

vacancy rate in the U.S. today would stand at 12%, as opposed to the all-in rate of 18.2%. 2 Most studies and conversations end there, by highlighting the conclusions for the most appealing, premier product or with hyperbolic pronouncements that the office market is “dead.” In this study, however, Cushman & Wakefield aims to illuminate the degree to which existing office inventory fails to meet occupiers’ needs for engaging, efficient and sustainable office space. In doing so, we directly acknowledge the bifurcated existing demand-supply imbalance, while also evaluating how much office product could be rendered undesirable by the changing needs of a hybrid workforce. With that collective recognition, the study then delves into options that both the CRE and broader macroeconomic industry can consider, ensuring that both individual office assets and communities as a whole can evolve and remain relevant, either through repositioning or repurposing.

1 Estimates for European markets such as London and Paris range between 50-60%. Average age estimates measure much younger in Asia Pacific, with considerable difference noticed between mature markets and emerging economies. 2 This calculation was provided to demonstrate the point that vacancy is highly concentrated. Not all buildings facing more than 50% vacancy are necessarily obsolete; some may be in lease-up, while others may simply have seen a large tenant move out even though the space may still have strong prospects to secure another tenant.