With a recession now appearing to be less likely than had been predicted and employment growth continuing, the NAIOP Research Foundation’s Office Space Demand Forecast predicts a gradual rebound in leasing activity.

Net office-space absorption in 2024 – the amount that is leased or occupied less the amount that is vacated or put on the market – is expected to be 5.7 million square feet. Moving forward, the forecast projects that net absorption will total approximately 4.5 million square feet during the first three quarters of 2025.

The forecast is authored by Hany Guirguis, Ph.D., Professor, Economics and Finance, Manhattan College, and

Michael Seiler, DBA, J.E. Zollinger Professor of Real Estate & Finance, College of William & Mary.

The forecast notes several trends that are affecting the beleaguered sector:

• As office leases expire, tenants are trading space for quality, leasing smaller spaces in newer buildings with modern amenities to draw workers to the office.
• New construction has slowed but given the lag between starting construction and delivering new office space, projects begun in earlier years continue to reach the market.
• The Federal Reserve’s continued efforts to quell inflation by raising interest rates at the expense of slowing economic growth seem to be having their desired effect. Inflation has been trending down since peaking in June 2022.

Although new construction has slowed, 17.1 million square feet of office has been delivered over the last two quarters due to the lag between a project’s start and its completion. The report states, “when combined with negative 12.3 million square feet of net absorption over the last two quarters, these completions have contributed to a rising national average vacancy rate, which reached 18.4% in the third quarter, the highest rate since 1992.” The average vacancy rate may continue to rise next year despite a rebound in net absorption if the delivery of new space continues to outpace demand.

“Several factors could still influence leasing activity next year,” said Marc Selvitelli, CAE, president and CEO of NAIOP. “If a recession remains at bay and the economy continues to grow with inflation in check, we can expect to see some forward momentum in the office sector. Newer, high-quality buildings should continue to outperform the rest of the market as companies seek space with modern amenities.”