Absorption of office space – the amount that is leased or occupied less the amount that is vacated or put on the market – is expected to remain negative through 2024 and 2025, though the rate of negative absorption is expected to slow to a near halt by the second half of 2025, according to the NAIOP Research Foundation’s Office Space Demand Forecast, which was released today.

“The office market performed worse in the first quarter of 2024 than previously forecast, with national office net absorption totaling a negative 13.4 million square feet,” according to the report. “Office utilization has remained relatively flat since the beginning of the year, possibly due to a reversal in optimism about the economy in late 2023 that may have led firms to pause expansion plans. Elevated interest rates are constraining corporate earnings and firms’ ability to expand their operations, which appears likely to continue, at least in the near term.”

“Given these trends and the possibility of a recession in 2024, net office space absorption over the last three quarters of 2024 is expected to be negative 11.8 million square feet. Moving forward, the forecast projects that net absorption in 2025 and will total approximately negative 4.5 million square feet.”

Although a structural shift in the use of space due to remote work (i.e., less office space leased per employee) has occurred, much of this change is already reflected in current market conditions. Occupiers have had several quarters to adapt to new work patterns, and macroeconomic and general business conditions will likely play a larger role in shaping their leasing decisions in the coming quarters, the report stated.

Once the economy returns to a trend of sustained growth and lower inflation, office demand should increase as firms need to lease space to grow their operations. Although such a scenario once seemed likely to occur in 2024, it is now unlikely to materialize until 2025 at the earliest.

“The interest rate environment is one that has remained stubborn, though commercial real estate sentiment overall remains positive, and industry-wide, we are still looking for conditions to improve into 2025,” said Marc Selvitelli, CAE, president and CEO of NAIOP. “Office has been most severely impacted by changes in work patterns driven by the pandemic. As overall economic conditions improve, we expect to see a corresponding increase in office space utilization.”