For the first time in at least seven years—and likely far longer—the U.S. is set to remove more office space from its inventory through conversions and demolitions than it adds via new construction, according to a new report from CBRE. The shift marks a major inflection point in the long-challenged office real estate market and suggests the sector may finally be inching toward stabilization and recovery.

CBRE’s analysis of office activity across 58 major U.S. markets finds that by the end of 2025, 23.3 million square feet of office space will be either torn down or repurposed for other uses. In contrast, just 12.7 million square feet of new office space is expected to be completed during the same time frame.

The trend has been building for years. New office deliveries have dropped sharply—from 51.2 million square feet in 2018 to only half that in 2023, and now to what CBRE projects will be a historic low of 12.7 million in 2025. Meanwhile, office conversions have surged, from just 5.5 million square feet in 2018 to 12.8 million this year, not even including demolitions.

In markets like Phoenix, the shift is especially stark. Fifteen projects totaling 3 million square feet are planned or underway this year to convert or demolish office buildings—compared to just 424,000 square feet of active new office construction. In other words, Phoenix will experience a net reduction in office space this year, mirroring the national trend—but at a greater scale.

Conversions to other property types, particularly multifamily, have gained momentum since the pandemic. In Phoenix, examples include Riverpoint and ICE Gallery, which have already transitioned from offices to industrial uses. Four more conversions are planned, including the Executive Center at Southbank near Sky Harbor Airport. Meanwhile, residential adaptations like the 163-unit One Camelback are reshaping the market, with projects such as the Punchcard Building adding 335 housing units along with retail and mixed-use features.

“This net reduction – albeit slight – of office space across major markets likely will contribute to lowering the vacancy rate in the quarters ahead, which would benefit building owners,” said Mike Watts, CBRE Americas President of Investor Leasing. “However, the conversion trend faces a few headwinds. The pool of ideal buildings for conversion will dwindle over time. And costs for construction labor, materials and financing remain high.”

The economic landscape isn’t making things easier. Tariffs have increased the price of construction materials and introduced added volatility that makes financing projects more complicated. Still, developers are pressing forward: CBRE reports an additional 81 million square feet of office space is already in the pipeline for future conversions.

According to CBRE’s market-level data, cities like Manhattan (10.3M sq. ft.), Washington, D.C. (9.2M), and Houston (6.7M) are leading in total square footage slated for conversion. Meanwhile, cities such as Cleveland and Cincinnati are converting the highest percentage of their total office inventory—8.4% and 6.6%, respectively.

Multifamily continues to dominate the conversion landscape, making up 76% of active projects. “The amount of residential units added to the national inventory from conversions won’t come close to solving the national housing shortage, but it will help, especially on a local level,” said Jessica Morin, CBRE’s Americas Head of Office Research. “Meanwhile, the office market will benefit as obsolete space is removed from the market in favor of the highest and best use. Additionally, conversions will boost the vibrancy of neighborhoods within various markets.”

In total, office-to-residential conversions have delivered 33,000 new housing units since 2016, with another 43,500 apartments and condos in the pipeline. The move signals a shift in how cities, developers, and investors view office properties in a post-pandemic world—no longer as fixed-use towers, but as flexible assets that can meet changing community needs.

While the national vacancy rate still hovers near a record 19%, positive absorption over the past four quarters and an 18% year-over-year increase in leasing activity offer further signs of cautious optimism.

Originally reported by AZ Big Media.