‘We Won’t Have Enough Office Space’: No Quality To Fly To As Construction Pipeline Runs Dry

Brand-new buildings have been among the few bastions of resilience in a struggling national office market. But the pipeline of that space — seemingly the only kind of space tenants are after — is drying up, with new construction poised to drop to unprecedented lows. 

The lack of new office construction on the horizon sets the stage for a potential inflection point next year when deliveries fall off a cliff even as tenants continue clamoring for top-tier space.

And whether they will respond by sticking around in desirable spots longer or by gravitating toward lesser-quality offices, the decision-making process will likely have a cascading impact on the country’s entire office market.  

“I expect by 2025, the story will be 20% vacancy, but we won’t have enough office space either,” Richard Barkham, global chief economist for CBRE, said at last month’s National Association of Real Estate Editors conference in Austin. “We won’t have enough of the kind of space that businesses want to lease.”

National office deliveries across the third and fourth quarters of 2025 are projected to come to about 3M SF, lagging well behind even Q1 2023’s 5.8M SF, which was the previous single-quarter rock bottom since CBRE Econometric Advisors began tracking deliveries in 2015.

Deliveries in the second half of 2025 will be just a sixth of the 18M SF of office that came online in the last quarter of 2019, according to data from CBRE EA.

Despite a punishing pandemic and the rise of remote and hybrid work emptying offices around the world, the newest Class-A space continues to see healthy demand metrics. 

The overall availability rate for U.S. office space sits at a historic high of 23.7%, made up of 20% direct availability and 3.7% sublease availability, according to a Q2 Avison Young office report. But Class-A buildings delivered in the 2010s and beyond have a 15.5% availability rate, much lower than the 27.8% availability rate for buildings in the same class that opened just a decade earlier. 

“There's still the need for quality office space, and so there's still that movement to Class-A,” said Ermengarde Jabir, director of economic research at Moody's. “Is there the possibility that there might not be enough Class-A space in the coming years? Yes, it's very possible.”

The flight to quality in the office space is well-documented, but the bigger unknown is how tenants will respond when the steady stream of shiny buildings they’re used to coming online each year slows to a trickle around the midway point of 2025. 

The reality of a hybrid workforce is causing some tenants with leases that are up in the next few years to reevaluate their needs for space, but they aren't reconsidering the quality of the space so far, said Allen Rogoway, managing principal at Chicago-based Cresa. 

“While tenants in Class A buildings with upcoming lease expirations are typically considering revisions to space sizes and configurations, none of our clients are considering going down in building class or sacrificing in locations which accommodate their workforce,” Rogoway said in an email.

Most tenants that have leased space in a Class-A building with modern amenities would be reluctant to go back to Class-B or C properties, said Marianne Skorupski, director of national office research at Colliers.

“If the ideal match isn't available, tenants might choose a short-term extension in their current location while waiting for a plug-and-play sublease to come on the market or wait for Class-A space in their preferred building,” she said. 

Jeff Pollock, owner and managing principal at Atlanta-based Pollock Commercial | CORFAC International, said he hasn’t yet been in a situation where a Class-A tenant couldn’t find a match with its desired finish and amenity package. The “overwhelming majority” of the tenants that are in high-quality spaces have continued to renew and optimize their desired square footage and layout, and he said he doesn’t expect them to vacate any spaces moving forward.

Companies that can’t find the Class-A space they want will sometimes occupy a lower-quality building and build out “dramatic space,” said Todd Monahan, executive vice president and managing director at Philadelphia-based Wolf Commercial Real Estate | CORFAC International. It’s a good solution for those companies, as they are often able to pay discounted rates, he said.

Some might also opt for creative office buildings that were once warehouses or factories and offer a brick-and-beam aesthetic instead of traditional high-rise office buildings, Monahan said. 

Tenants are still largely calling the shots in their battle with office landlords.

Zach Fox, an asset manager at Chicago-based Urban Innovations, said tenants signing new deals in top-of-the-market product are offsetting the increase in rental rates by planning out more efficient space and reducing their overall square footage by anywhere from 10% to 25%. The rising cost of concession packages and vacancy rates nearing records have made executing renewals for quality tenants the highest priority for landlords. 

“Landlords are fighting harder than ever to keep existing tenants in place,” Fox said. 

There is a litany of obstacles preventing a surge in office construction that would help absorb a possible Class-A demand imbalance in the coming years, with tricky capital markets chief among them.

Jabir said there is a lot of uncertainty over the balance between supply and demand in the present office environment. Meanwhile, elevated interest rates are helping to keep the construction pipeline in stasis. 

“[It’s] the straw that has temporarily broken the camel's back,” Jabir said.