U.S. Office Glut Decades in the Making

The surplus in office space around the country may be getting a lot of attention after the pandemic and the explosion of work-from-home opportunities. However, The Wall Street Journal reports that this office glut has been decades in the making…(WSJ)

Konrad Putzier in the Journal writes that “America’s office glut has been decades in the making, real estate investors, brokers and analysts say. U.S. developers built too many office towers, lured by federal tax breaks, low-interest rates, and inflated demand from unprofitable startups. What made problems even worse was landlords also failing to tear down or convert old, mostly vacant buildings to other uses at the same time.

The rise & fall In 1981, to help get us out of a recession,  the Reagan administration allowed investors to depreciate commercial real estate much more quickly than before which lowered their tax bills. While demand did rise in the 1980s as the economy exploded. However, office space demand began to wane in the 1990s and then saw a sharp drop off after the ’08 financial crisis. However, the journal notes that “low-interest rates and a flood of global capital into the U.S. real-estate market propped up the values of buildings even as demand for offices fell.”

USA, USA. The office oversupply does appear to be mostly an American problem. According to brokerage JLL, about 19% of U.S. office space was vacant in the second quarter, compared with 14% in the Asia-Pacific region and 7% in Europe, the Middle East, and Africa.

Many observers, including myself, have noted that the solution could be staring us right in the face. We currently have too much office space and too little residential real estate. So why not just convert this office space into residential? While that is possible and can be profitable in some areas Julie Whelan, global head of occupier research at brokerage CBRE says it might not be that easy. She notes that high-interest rates and rising construction costs make conversions more difficult, “It’s not going to be the savior of all that obsolete office space,”