Office/Occupier

Office Market Stabilization Expected

The U.S. office market is set for a pivotal shift in 2025, with stabilization paving the way for a new cycle. With office attendance reaching a steady state and a soft landing for the economy, occupiers can conduct portfolio planning with increased confidence.

Occupier sentiment will shift from a contraction-oriented approach to one of stabilization and even expansion, supporting office space absorption. This positive shift, along with a significant slowdown in new supply and declining interest rates, sets the stage for the most optimistic outlook in years. However, certain challenges will remain, including subpar office-using job growth, a substantial amount of sublease space and high vacancies in less desirable office properties.

Occupier Strategy

More than one-third of respondents to CBRE’s 2024 Occupier Sentiment Survey plan to increase their portfolio requirements over the next two years, while 25% expect no change. This will support positive office absorption in 2025. Large companies with more than 10,000 employees will drive most of the downsizing, while small companies with less than 1,000 employees will drive most of the expansion. Although rightsizing will continue in 2025 due to pre-pandemic inefficiencies and space reductions from hybrid working, much of this adjustment has already taken place over the past four years.

A healthy pipeline of tenants actively seeking office space is a precursor to a 5% rise in leasing volume in 2025. Smaller tenants looking for between 10,000 and 20,000 sq. ft. will account for more than half of total leasing volume.

Manhattan, which was one of the worst-hit markets by the pandemic, will continue to rebound next year. The market’s active tenant pipeline is above its pre-pandemic average, indicating increased leasing volume ahead. Other markets with high demand that can be satisfied by new prime office deliveries include Austin, Nashville and Miami.

Many tenants will decide to renew their current leases due to high moving costs and difficulties in assessing landlords’ financial health. Renewals will make up a large share of leasing volume compared with historical averages. Landlords will be more willing to negotiate favorable terms with large tenants rather than risk vacancy.

Tenants that relocate will prioritize buildings in prime locations with first-class amenities. As these spaces become more scarce, demand will spill over to the next tier of buildings.

Figure 7: Expected Portfolio Size Change Over Next Three Years

Market Divide

The divide between high-quality and lower-quality office assets will widen in 2025. High-quality assets in vibrant mixed-use districts will continue to attract tenants. Occupiers of Class A space are the most likely to upgrade to better locations. More cost-conscious tenants in sectors such as government, healthcare and education will continue to drive demand for a large pool of available Class B and C space. Commodity buildings in less desirable and office-centric districts are the most at risk of losing tenants. Landlords of commodity buildings, who are also competing with the 175 million sq. ft. of discounted sublease space on the market, will have to lower asking rents.

Office tenants will be increasingly diligent in ensuring that landlords are financially stable enough to service their debt and maintain their properties.

Prime spaces will become more scarce due to the slowdown in new construction. By conservative estimates, vacancy in prime buildings is expected to return to its pre-pandemic rate of 8.2% by 2027. However, prime space will be difficult to find in many districts next year, such as Midtown Manhattan and Downtown Miami. Tightening availability will give owners of prime buildings the upper hand in lease negotiations and rents will continue to rise.

New Office Starts Plummet

The office construction pipeline is notably thin, with new supply expected to fall to 17 million sq. ft. in 2025, well below the 10-year average of 44 million sq. ft. While a few markets, including Austin, Nashville and Dallas, will experience near-term oversupply, the construction slowdown will be a welcome reprieve in most markets. The overall office vacancy rate is expected to peak at 19% in 2025.

Increased conversion and demolition activity will remove largely vacant and outdated office space from the market. While conversion activity will remain well above historic norms, these projects still represent a small fraction of the overall office market. More financial incentives in addition to an anticipated reset of pricing will be needed to make these projects financially viable.

Figure 8: Office Completions

Demand Tailwinds & Headwinds

Tailwinds for the office sector include falling interest rates, greater corporate confidence in a soft landing for the economy, deregulation and office-using employment at a record level. There also will be a mild increase in office attendance rates. Against these positives will be lower future growth of office jobs due to labor shortages and the use of artificial intelligence for certain jobs.