The looming office space real estate shortage. Yes, shortage

There is more pain to come in the office real estate market across the U.S., with maturing debt needing to be refinanced and a wave of expiring leases, but there is also what may seem at first brush to be a counter-intuitive message being sent to top tier companies by real estate intelligence company CoStar Group: prepare for an office space shortage.

You read that right: amid a commercial real estate market across U.S. downtowns being described in apocalyptic terms, CoStar sees a shortage on the horizon, with one key caveat for top companies to bear in mind.

The more office real estate that disappears – an estimate recently given to CNBC by the CEO of major bondholder TCW Group forecasts up to one-third of office real estate still to be wiped out – the more the major players in the market will be vying for the top tier of Class A commercial space. Add to that the fact that more companies are headed back to an in-office reality closer to pre-pandemic expectations, and competition may be hotter than the weaker end of the market suggests.

CoStar’s call of an upcoming office space shortage is predicated on a look at the current data on leasing and construction activity compared to recent market history. As office occupiers scrutinize their footprints more carefully, and in the months ahead leases that were executed before the pandemic continue to approach expiration, newly constructed buildings aged 0-3 years are proving to be the winners. They have attracted over 175 million square feet of net new occupancy since the beginning of 2020, an average of 12.7 million square feet per quarter. By comparison, the quarterly average from 2011-2019 for similar properties was 11.7 million square feet. From 2008-2010, during the Great Recession, the quarterly average was 13.6 million square feet.

“Modern, premium office space remains in demand, just as it has historically, even during difficult economic times,” said Phil Mobley, national director of office analytics at CoStar Group.

And the supply will increasingly not be there to support the demand. Currently, buildings aged 0-3 years comprise 2.4% of office inventory in the U.S. While that is in line with the average from 2015-2019, Mobley says construction has slowed dramatically. Less than 30 million square feet has broken ground in 2023, making this year the lowest for construction starts since 2011. Today, there is about 200 million square feet of office space in buildings aged 0-3 years, but that figure will be under 150 million by early 2026 and under 100 million by the middle of 2027. At that point, it will represent only about 1% of inventory. Even in the aftermath of the Great Recession in 2013-2014, buildings aged 0-3 years never represented less than 1.3% of inventory.

“The very type of space that tenants…