Hi Slindley,
This is Neo Zhu from Office365 support.
Based on your description, you have enable the dirsync on your Office365 tenant. Also, you have created the public folder on Office365 side and move the context from local to cloud. The problem is once you want to change the public folder email address ,it doesn’t work. (In your word, the Office365 service shows the email address is using by a local mailbox).
If this is the case, I have confirm that the public folder email enable objects can not be synced to cloud side. I also check this support.microsoft.com/default.aspx . However, unfortunately they are not listed on that artcle. It means one of the mailbox or group uses that address. We can login to OWA -> compose “a new mail” –> input the mail address -> Search contacts & directory . Use this way, we can’t find out the conflict SMTP address.
If we can’t find our the SMTP address, can you provide a screenshot of the error message when you add the SMTP address on Office365 public folder?
Thanks,
Neo Zhu