U.S. Office Market Poised for Recovery
Key Takeaways for the U.S. Office Market:
- The office vacancy rate set another all-time high, though that growth is beginning to moderate
- Supply-side pressure has all but shut down, setting the stage for future recovery.
- Increasing investment sales will result in new opportunities for tenants.
As of midyear 2025, the U.S. office market fundamentals appear to have reached their lowest point, with varying levels of recovery anticipated during the latter half of the year. While vacancies remain elevated, the pace of increase is slowing, and fewer spaces are returning to the market compared to the period from 2021 to 2023. Average asking rents are beginning to stabilize. Further, new development in the pipeline remains constrained at only 31M SF, significantly lower than the peak of 158M SF at the end of 2019.
The vacancy rate increased 10 basis points over the quarter, to 18.4%, another record high for the U.S. average and a 40-basis-point higher year-over-year. This was largely driven by 4.1M SF of new deliveries in the second quarter of 2025, much of it without preleasing. However, this new construction total was the lowest in more than 10 years, which could reduce growth in vacancy rates caused by new buildings.
Net absorption for the second quarter was negative 152,000 SF, ending three consecutive quarters of positive growth. However, the year-to-date total remains positive at 1.5M SF. Manhattan continued to lead the country, with absorption of 3.5M SF during the second quarter. Many markets are now seeing stronger leasing activity and demand from post-pandemic lows, which could drive improved fundamentals over the next six to 12 months.
What’s Driving Occupiers?
In today’s rapidly evolving corporate real estate landscape, occupiers face heightened pressure to align their real estate strategies with shifting business priorities and workforce expectations. The office is no longer just a place to work — it must now function as a strategic asset that attracts and retains talent in an increasingly competitive labor market. At the same time, economic uncertainty, rising capital costs, and operational volatility are driving a stronger need for flexibility in both occupancy strategies and lease structures. The widespread normalization of hybrid work has further intensified demand for adaptable, efficient, and cost-conscious solutions. As a result, even routine lease renewals now require a more strategic lens — evaluating space needs, employee engagement potential, and return on capital investment to ensure that every decision supports both resilience and agility across the portfolio.
SUBLEASE AVAILABILITY
Sublease availability continued to shrink, to 191M SF at the end of the second quarter. Fewer large blocks of space are being put on the market, since tenants used pending lease expirations to grow or contract as needed. An increasing amount of the sublease inventory is also nearing the end of the lease term, when it will return to the landlord. As a result, the overall vacancy rate remains unchanged this quarter.
CAPITAL MARKETS: INVESTMENT RISING
The office sector has posted the strongest sales gains of all asset classes, with investment volume rising 51% to $18.1 billion in the second quarter of 2025. While this is a positive sign, it’s important to remember that volume is coming off recent lows. In 2019, quarterly volume was twice as high as it was this quarter. Central Business District assets are the main driver of recent growth, up 74% compared to last year. Manhattan is far and away the leader in investment sales volume for the first half, followed by East Bay, Los Angeles, Houston, and San Jose. Notably, East Bay and Fort Lauderdale set records for sales volume through the first six months of the year.
LOOKING AHEAD
Projections for the second half of 2025 remain clouded by uncertainty in the economy as companies take a wait-and-see approach. However, increased leasing activity and growth from 2024 are expected to support improved leasing activity and market fundamentals in many major markets. Rising investment activity will bring in new building ownership in many markets and new capital to fund transactions. This will give tenants more options, as the majority of the country’s office markets remain firmly in their favor.
Vacancy
- The Northeast, led by growth in Manhattan, was the only region with a decline in vacancy year-over-year. The 10-basis-point drop was significantly better than the 50-60- basis-point increases over the same period in the Midwest, South, and West.
- The Class A vacancy rate rose 10 basis points over the quarter, to 21.4%, while the Class B vacancy rate rose 20 basis points; in both sectors the vacancy rate was 40 basis points higher than in the second quarter of 2024.
Net Absorption
- Net absorption declined by 153,000 SF in the second quarter, marking the first drop in demand after three consecutive quarters of growth. However, that is modest compared to the declines between Q4 2022 and Q2 2024.
- Manhattan has posted 14.7M SF of net absorption over the past 12 months, by far the largest amount of any market in the country. Silicon Valley, in second place, absorbed 2.1M SF during that period.
- The Northeast and South were the two regions to record positive absorption for the quarter. In both cases more than half of their markets experienced demand growth.
Rental Rates
- Class A asking rent fell 0.2% quarter-over-quarter, while the average Class B rate increased 0.4%. The Class C average rate decreased 0.4% during the same period. However, over the past year, the Class A rate declined 0.1%, while Class B and C properties posted increases of 1.8% and 1.5%, respectively.
- The Tampa Bay office market’s rent growth was the highest in the U.S. in the quarter, increasing 10.1%, to $32.08/SF.
Construction Activity
- The 4.1M SF delivered in the second quarter is the smallest quarterly total in over 10 years.
- Charlotte had 563,000 SF of new space delivered during the second quarter, the largest amount for all markets. In the first half of the year, Baltimore has seen the most new space delivered with more than 967,000 SF completed
- Eleven markets account for 62% of the total development pipeline, but almost 70% of markets have at least one project under construction.
Download the full report here.
You might also like the Houston Office Market Report Q2 2025.
