The Office Market 2025: Turning the Corner

While the story isn’t the same across the board, signs point to the office market stabilizing and taking small steps toward recovery.

The COVID-19 pandemic remade the way we work and left the office market reeling. As remote work became the norm, office vacancies soared, careers stalled and buildings sat in darkened gloom. However, according to recent interviews with industry professionals, this troubled property sector is showing signs of renewed life and even the makings of a recovery.

Uneven Recovery

North American office markets are in different stages of recovery. While New York City is seeing big leases signed, West Coast markets such as Los Angeles, San Francisco, San Diego and Seattle have been slow to recover. “The West Coast is better than it was last year or two years ago, but recovery is lagging over what we see in the East or even in the Sunbelt,” said Michael Soto, vice president, research West at Savills.

Raymond Wong, CRE, vice president at Altus Group in Toronto, said that based on fourth-quarter numbers for 2024, it appears the market is plateauing overall, although some markets are still declining. “The main challenge remains the relatively high office vacancy rate,” he said, “but we’re beginning to see signs of a peak in those numbers.”

In the U.S., a CBRE market report noted that net absorption of office space totaling 10.3 million square feet in the fourth quarter of 2024 was the highest quarterly total in three years. It was also the third consecutive quarter of positive demand. Meanwhile, space under construction at year-end fell to 24 million square feet, less than half the amount from a year earlier. The overall vacancy rate in the fourth quarter declined slightly to 18.9%

According to another CBRE report, the Canadian office market in 2024 recorded its first year of positive net absorption since 2019.

“It’s important to note that the 19% vacancy [in Q3 2024] is not spread evenly across markets,” said Julie Whelan, global head of occupier research at CBRE. “Major gateway downtown markets have been hit hardest, but even within those markets, the best quality space is often outperforming the overall market metric. It is a varied story market to market and even within submarkets.”

Following five consecutive quarters of shrinking demand, net absorption of office space turned positive in the second and third quarters of 2024, according to the NAIOP Research Foundation’s Office Space Demand Forecast. Although it is still possible that a recession could delay a recovery, recent trends suggest the office sector is stabilizing and that demand for office space will grow modestly in 2025, according to the report.

Trophy Space Leads the Way

Trophy spaces, with their state-of-the-art amenities, are dominating the office market. Tenants are generally willing to pay higher rents to secure these premier spaces, aiming to entice employees back to the office. But this flight to quality may soon result in a significant shortage of space, as much of the existing trophy inventory is leased and planned projects remain fallow, awaiting financing.

“Our prediction is that within a few years, [trophy buildings] will essentially be out of space,” Whelan warned. This looming scarcity highlights the need for upgrades in the next tier of office properties to meet tenants’ high expectations.

“This supply shortage means companies seeking high-quality spaces should act quickly,” said Amber Schiada, head of work dynamics research for the Americas at JLL. “Tenants waiting too long may face limited options in the next three to five years.”

Mike Watts, president of investor leasing in the Americas at CBRE, underscored that tenants are becoming more selective. “Demand isn’t just for premium finishes but also for convenience, accessibility, and locations that align with workforce needs. Even newly constructed offices can sit empty if they fail to meet these criteria,” he said.

Consider New York City. Employees commuting by train from Westchester County or Connecticut arrive at Grand Central Station, where nearby trophy-class office buildings offer an ideal commute. In contrast, premium offices located downtown or on Manhattan’s west side can add another 45 minutes to an hour of travel time each way. Unsurprisingly, proximity is a key factor driving demand for certain trophy spaces.

As trophy space becomes scarce, mid- to large-size occupiers are turning to A and A-minus properties, explained Danny Mangru, U.S. office lead for market intelligence at Avison Young. Even Class B and C buildings are benefiting. Mangru observed that leasing activity in these categories grew from 29% in 2023 to nearly 32% in 2024. While these spaces may require upgrades, they are increasingly seen as viable alternatives for tenants unwilling or unable to compete for premium properties.

This shift reflects a broader rebalancing in the office market, where the demand for quality workspace extends beyond the top of the market. For developers and investors, opportunity exists in repositioning lower-tier properties to meet evolving tenant expectations.

Getting a Handle on Hybrid Work

Hybrid work in some form is likely here to stay. While some tenants have used this opportunity to downsize their office requirements, others are maintaining their existing spaces and adding amenities to inspire employees to come into the office and to better accommodate varied schedules.

“The pandemic fundamentally upended everything we know about how we work,” Schiada said, “Remote work became possible, and employees experienced greater flexibility and improved work-life balance. This has led to significant resistance to returning to the office full time.”

Many organizations are working to redefine the office’s value proposition to encourage employees to return more frequently, she said. “[JLL’s] research shows that 44% of global real estate decision-makers now mandate five days a week in the office — up from 34% two years ago. However, the average office attendance is still around three days per week.”

Subleased Space: Stabilizing

The amount of sublease space available during the pandemic was deeply troubling, but those conditions are easing, according to Cushman & Wakefield’s fourth-quarter 2024 U.S. office report, which noted that sublease inventories have declined for three straight quarters.

“Key indicators suggest improvement,” Mangru said. “Supply is decreasing, sublease space is dwindling, and leasing activity is picking up in key markets like Manhattan. Office utilization is also rising, signaling increased demand.”

Harry Klaff, principal and U.S. president of Avison Young, said, “We’re seeing longer lease terms, which could support financing for new developments. While construction is limited now, we anticipate demand for new top-tier spaces in high-demand areas. I expect the office market to be in a far better position next year and even better two years from now.”

Tenant Concessions

At present, it continues to be a buyer’s market, with lessees able to get major tenant improvement dollars to either stay in their current offices or move to a new location.

An Avison Young U.S. office market report showed that the average value of concessions as a share of U.S. lease terms was 26%. This means a tenant paying $100 per square foot will, on average, receive $26 per square foot in concessions per year in the form of free rent and tenant improvement allowances.

Concession packages have grown every year since the beginning of the pandemic in 2020 and were up 6.8% in 2024 compared with 2023, according to Avison Young.

The Coworking Space Comeback

During the pandemic, the last thing office workers wanted was to share a tight space with someone else. That fear has largely subsided. In fact, coworking spaces are experiencing a resurgence as companies and workers seek flexible solutions.

“We are bullish on flexible space,” Klaff said. “Flexible space arrangements, including coworking, are becoming increasingly important. Tenants want to save costs and adapt to changing needs. Many landlords are incorporating flex options like tenant lounges and reservable desks. In Manhattan, some coworking operators are leasing entire buildings, offering tenants a combination of coworking services and dedicated spaces.”

“The flight to quality in office spaces is about more than just premium buildings or locations,” said Kane Willmott, co-founder and CEO of iQ Offices, the largest Canadian-owned co-working operator. “It’s about creating holistic experiences that drive engagement, productivity and meaningful ROI on workspace investments. Coworking spaces are leading this charge, blending flexibility with thoughtful design and hospitality to meet the evolving needs of today’s workspace occupiers.”

Obsolete Office Buildings

In the current office bust, newer buildings are likely to survive and prosper while older buildings try to find a path forward. In some cases, companies in aging buildings are satisfied to get a break on their rent and then use the saved money elsewhere. Owners of older office buildings might be able to carve out a niche as the primary low-cost providers in their markets and still make a profit. In other cases, however, the only feasible options might be to convert an old office building to another use or tear it down.

“Older office buildings are what’s driving a lot of the availability in key markets,” Soto said. “There are buildings that are no longer competitive, and for a lot of landlords this is on a building-by-building basis. Some landlords will tell you, ‘We have no debt on a particular older building, so we are OK being the low-cost provider in the market.’ But on other buildings, the landlord might conclude there is simply no justification for the property to continue as an office building.”

Soto pointed to New York City as an example of what is happening with older buildings. He said many major financial services firms have relocated to Midtown, favoring modern and newer office spaces, particularly near Grand Central Station. Meanwhile, in Lower Manhattan, older office buildings are being converted into residential properties, often of the high-end variety. “This trend is happening nationwide, but converting office buildings in CBDs [central business districts] remains a tough challenge and an expensive undertaking,” he said.

Opportunistic investors are increasingly focusing on suburban areas for such conversions. For example, around Los Angeles, suburban office buildings located in industrial zones are often more suitable for redevelopment, with some being demolished and replaced by warehouses, Soto said. Suburban office buildings that are either underperforming, have a high vacancy rate, or have lost a major longtime tenant are primary targets for conversions and redevelopment, he added.

Residential conversions are often the highest and best use for obsolete buildings, especially in cities with housing shortages. However, not every building is suitable for conversion due to high costs, fundamental structural differences and zoning challenges. Other potential uses include health care facilities or boutique hotels or tearing them down to create green spaces, Klaff noted.

“Class B and C offices are struggling,” said Bryan C. Connolly, partner and co-chair of U.S. real estate practice at DLA Piper. “Strategies depend on the owner and location. Some explore conversions to residential or mixed uses, while others restructure or hold out for better conditions. Some properties are so obsolete they’re not attractive for further investment.”

Investors, Bankers and Regulators

After the pandemic, the office market was hit with a variety of other negatives: high inflation followed by high interest rates, the threat of recession, distressed assets and discounted acquisitions.

“The rise in interest rates has impacted commercial real estate construction costs and financing, while also pushing cap rates higher, which has significantly affected property values,” Connolly explained. The Federal Reserve’s decision to lower rates three consecutive times beginning last September— and what that indicates for future interest rate reductions — has encouraged the industry, he said.

“The hope, supported by data, is that inflation is being contained. This supports the decision to continue lowering interest rates. If inflation stays under control, we anticipate a more favorable environment for real estate investment going forward,” Connolly said.

Regarding loan refinancing, “It varies depending on the asset class and type of loan,” Connolly continued. “Multifamily and industrial properties have performed well and can often refinance and reposition themselves. Class A+ office properties have also done well. However, other office products have struggled, with some owners giving properties back to their lenders or pursuing other workout options.”

Office Market Outlook

There is optimism that the office market will finally turn around in 2025, although the degree of uncertainty remains high. One thing is clear, however: Developers, investors and owners who embrace flexibility, modernization and innovation will be the primary drivers of success in the market. Here are some takeaways from industry professionals:

Recovery will be slow. Soto of Savills believes the U.S. office market is heading in the right direction. “We are in a better position than we were two years ago, though we’re not back to 2019 levels yet,” he cautioned. “Progress will happen gradually.”

The office market is more stable than in the past 24 months. However, companies are still trying to decide how much space they need. “Buildings that have outlived their usefulness will likely be converted or removed from the market, thus lowering inventory,” said Wong of Altus Group. “I am slightly optimistic, and I think we are heading in the right direction regarding the office market.”

Big companies are making long-term commitments. Law firms, hedge funds and consulting companies are making large, long-term lease commitments. “We hope and expect other sectors and industries to follow as they figure out their actual space requirements and feel confident about their needs,” said CBRE’s Watts. “In a quick straw poll I did with our top tenant representation brokers — those working with the major tenants — 100% believed that leasing activity next year would be better than at the same time this year. That’s not overly bullish, but the trend suggests more companies are ready to make longer-term commitments.”

Occupiers are moving to expand space. “While some contractions are still happening, there are far fewer, and many more occupiers are moving into expansion territory,” said CBRE’s Whelan. “When you combine that with general renewals and the natural churn in the market — where companies need to find space as leases roll over — it feels like we’re in a good position” heading into 2025.

The availability of top-tier space is dwindling. A consistent sentiment expressed by industry professionals interviewed for this article is that tenants should not delay their decision-making regarding office space. “While the office market may seem slow, high-quality spaces are in short supply,” cautioned Schiada of JLL “Companies aligning their office portfolios with business growth plans and talent needs should act now to secure the best locations. The competition for top-tier office space will intensify as supply remains constrained, making early decisions a strategic advantage.”

Lower interest rates will help drive transactions. “For commercial real estate overall, we’re optimistic. Lower rates and ready capital should drive investment and transactions,” said Connolly of DLA Piper. “For the office asset class, the outlook is less clear, though recent data indicates that office vacancy rates may have bottomed out, offering hope for increased occupancy in the coming years.”

Ron Derven is a contributing editor to Development magazine.

• Magazine Article
• Coworking
• Office
• Redevelopment
• Hybrid Work Schedules
• Office Amenities