The U.S. office sector is poised for recovery, driven by rising demand and a shrinking construction pipeline. Historically, renovated office buildings perform well during the early stages of an economic recovery. However, several factors could limit property owners’ ability to capitalize on this trend.
After the Great Recession, newly renovated buildings saw strong occupancy gains, with net absorption rising by an average of 4.8% from 2013 to 2015. However, competition from new projects eventually slowed demand, and by 2020, renovated buildings faced the same pandemic-driven occupancy losses as the broader market.
Currently, the office sector is seeing conditions similar to the early 2010s, with office space under construction dropping below 70 million square feet—its lowest level in 13 years. Leasing activity has returned to pre-pandemic levels, and if the economy avoids a recession, the stage is set for a recovery.
However, to fully benefit from this recovery, renovations must accelerate. Renovation activity has slowed considerably in recent years, with only 2.5% of office inventory renovated in the last three years. The renovation pipeline is currently at just 11 million square feet, a fraction of what was underway in 2019.
There are several reasons for this slowdown. Unlike after the Great Recession, asset values have taken longer to reset, delaying the confidence needed to make major renovations. Additionally, interest rates have risen significantly, removing the capital investment tailwind that helped drive renovations in the early 2010s. Moreover, lenders are still working through existing office loan issues, limiting their ability to finance new projects, while many investors are pulling back from the office sector due to poor returns.
Despite the slowdown, there’s still time to act. Renovations typically take less time than new construction, and the window of opportunity for capitalizing on the recovery is still open.
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