U.S. Office Market Report | Q1 2025

by Coy Davidson | May 22, 2025

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The U.S. office market started 2025 with positive momentum from the end of 2024 but ended the first quarter with significant uncertainty. The road to recovery remains uneven.

Key Takeaways for the U.S. Office Market:

Manhattan is leading the office recovery, reaching pre-pandemic leasing and net absorption levels.
Prolonged economic uncertainty could slow the speed of recovery in the nation’s office market.
Tenant rightsizing remains prevalent, but return-to-office policies have led to some tenant expansions.

The U.S. office market started 2025 with positive momentum from the end of 2024 but ended the first quarter with significant uncertainty. The road to recovery remains uneven across the country, with Manhattan leading. Leasing has grown in several markets, but prolonged economic uncertainty could derail that momentum.

Fundamentals are better in most U.S. office markets than in the immediate post-COVID period. Fewer large blocks of space are being returned, asking rents are steady, and more markets have pockets of growth.

The vast majority of U.S. office markets remain soundly in favor of tenants. Almost three-quarters forecast flat or positive absorption, significantly improved from one year ago. Landlord concessions have peaked in most markets, and in 63.2% of them, are projected to remain at current levels, compared to 53.5% of markets one year ago.

Tariff uncertainty is contributing to delays in leasing decisions, as companies across industries assess potential impacts on revenue and operations. Capital expenditures for base building improvements are also being reconsidered due to fluctuating material costs and availability. As a result, market performance may continue to diverge, with higher demand for Class A, well-positioned, move-in-ready assets. New construction activity remains limited and is largely concentrated on projects with substantial pre-leasing commitments, given ongoing challenges related to material pricing, labor, and financing.

SUBLEASE AVAILABILITY

Sublease availability declined as more tenants downsized after lease expiration instead of putting space on the market. Fewer large blocks of space are on the sublease market as companies begin to understand how office occupancy affects space needs. The amount of sublease space fell by 5.9% from the fourth quarter of 2024 and by 12.9% from one year ago. And for the first time in two and a half years, the amount of space fell below 200M SF.

Vacancy

The 18.2% vacancy rate at the end of the first quarter was 30 basis points higher than rates last quarter and one year ago.
The Class A vacancy rate increased 40 basis points from one year ago, while the Class B vacancy rate of 16.6% was 20 basis points more in that period.
Of the four regions, the West had the highest vacancy rate, 19.5%, while the Northeast’s rate of 16.5% was the lowest.

Net Absorption

This was the first time in more than two years with three consecutive quarters of positive net absorption.
The quarter’s 1.7M SF was the highest quarterly net absorption since the third quarter of 2022. Driven by Manhattan, CBD submarkets totaled 1.9M SF of net absorption, while suburban submarkets had 190,000 SF returned.
Preference for the top market tier was evident, with 5.5M SF of net absorption in Class A properties across the country. Limited demand for older commodity space led to 3.8M SF returned in Class B and C properties.

Rental Rates

The average asking rate, across all classes, was $37.12/SF, up 1.1% from last quarter and up 0.5%from one year ago. This is an all-time high; the average was above $37/SF for the first time.
Concession packages have reached their peaks in most markets. They will likely remain at current levels for the near term.
The Class A average asking rent of $42.46/SF was up 0.3% from last year and 0.6% from the fourth quarter; the Class B average of $30.64/SF was up 1.1% over last year and 0.5% from the fourth quarter.

Construction Activity

The 5.6M SF delivered in the first quarter was the lowest quarterly total in more than 15 years. Silicon Valley, Manhattan, and Baltimore added 830,000 SF.
Over the past two years, Manhattan has added the highest amount of new construction, 1.7M SF, followed by Austin’s 756,000 SF of new space.
The 33.5M SF under construction at the end of the quarter continued the quarterly decline since mid-2020. More than 65% of construction is concentrated in 13 markets.