The U.S. office leasing market has reached a new phase—one that remains below pre-pandemic activity levels but is showing signs of stabilization. While demand is not as robust as it was before 2020, a shift has occurred: companies are slowing their space reductions, and overall leasing volume is holding steady. According to CoStar, office demand turned positive at the end of 2024 for the first time since 2021, signaling a potential turning point for the sector.

At the same time, the supply of newly constructed office buildings is at historic lows, a trend expected to persist for years. The combination of stabilizing demand and a slowdown in new supply could mark the beginning of the end of the prolonged struggles that have characterized the office market in recent years. However, the sector is not out of the woods yet. Recovery remains uneven across major markets, and uncertainty lingers about long-term office space needs.

A More Optimistic Forecast for the Office Sector



The shifting momentum in the office market has led to a more optimistic outlook than previously expected. CoStar’s latest base-case forecast now predicts that the national office vacancy rate will peak at approximately 14.5% in late 2026—about 70 basis points lower than previous projections and occurring four to six quarters earlier than initially expected.

Additionally, rental rates, which were once forecasted to decline in 2025, are now expected to remain in positive territory. While growth will be modest—projected at just 1%—it represents an improvement from prior expectations of negative rent performance.

Another encouraging sign for the sector is an unexpected increase in office property sales volume in Q3 2024 compared to the previous year. Although investment in office real estate remains well below historical averages, this uptick suggests that some investors see value in the sector again. Cap rates are now projected to peak by mid-2025, potentially signaling a stabilization in office asset pricing.

Several factors have contributed to the improved outlook, including stronger-than-anticipated economic and job growth in 2024. Perhaps even more significant is the slowdown in office space reductions. In the second half of 2024, many companies significantly reduced the rate at which they were downsizing their office footprints. This suggests that businesses may be reaching the end of their adjustments to post-pandemic workplace dynamics, which had previously driven widespread reductions in office space usage.

Source: CoStar News

Return-to-Office Mandates Are a Key Factor in Market Shifts

One of the biggest drivers of office market stabilization is the increasing number of return-to-office mandates from major employers. Several large corporations—including Amazon, Southwest Airlines, Salesforce, IBM, Dell, and The Washington Post—have recently implemented policies requiring more in-office attendance. Many of these mandates will take full effect in 2025, reinforcing the idea that office space remains a critical component of corporate operations.

Across industries, employers are stepping up efforts to bring workers back to physical offices after years of remote and hybrid work. While flexible arrangements are expected to remain a permanent feature of the workplace, the growing emphasis on in-person collaboration is influencing companies' real estate decisions. Stakeholders view these mandates as a sign that office space demand could strengthen after years of weak leasing activity.

Source: CoStar News

Leasing Trends: More Deals, Small Spaces

In 2024, leasing activity remained remarkably steady, with tenants signing new leases for approximately 417 million square feet of office space—averaging about 1.2% of total inventory per quarter. While this level of leasing remains about 13% lower than the pre-pandemic average from 2015-2019, the consistency in activity suggests the market has found a degree of stability.

However, one clear trend has emerged: while more leases are being signed, they tend to be for smaller office spaces. By the end of 2024, lease transactions had surpassed 30,000 per quarter—a level not seen since 2018. Yet, the average lease size was just over 3,400 square feet, the smallest since mid-2021, when pandemic restrictions still limited office attendance.

This trend indicates that while businesses are committing to office space, they remain cautious about taking on large footprints. Many companies continue to optimize their layouts for hybrid work models, prioritizing flexible and efficient office configurations over expansive traditional offices.

Source: CoStar News

Office: Fort Collins, Loveland & Larimer County

Source: CoStar

Office: Greeley & Weld County

Source: CoStar

Office Market Stabilizing, But Geographical Disparities Persist

Despite encouraging national trends, the office market’s recovery remains highly uneven across regions. Occupancy gains in Q4 2024 amounted to 2.7 million square feet, but nearly all of that growth was concentrated in New York. Other major office markets, including Boston, Chicago, Los Angeles, and Washington, D.C., continued to see declining occupancy.

Across the 50 largest office markets in the U.S., about half still experienced occupancy losses at the end of 2024, despite the net national gain. This uneven performance suggests that certain cities and office districts are better positioned for recovery than others.

A key challenge for the office market is that demand remains closely tied to specific industries. Job growth in professional services and healthcare has helped fuel office leasing, but technology companies—once a dominant force in office real estate—have seen employment stagnate. The past two years have also demonstrated that office job losses can occur even in the absence of a broader economic downturn, underscoring the volatility in office demand.

What's Next for the Office Market?

While the office sector is showing signs of stabilization, the road to full recovery will be slow. The expectation is that office demand will return to balance gradually, supported by moderate job growth. However, vacancy rates are likely to remain structurally higher than in the past.

One positive factor is the limited supply of new office buildings. With construction activity at historic lows, the influx of new supply into the market will remain minimal. This could help prevent further downward pressure on occupancy rates and rents. Additionally, much of the existing vacancy is concentrated in older, less competitive office buildings. High-quality, modern office spaces—especially those in prime locations—are expected to see stronger demand and rental growth.

Ultimately, the performance of the office market will vary widely across different cities and asset types. While some locations are seeing early signs of recovery, others continue to struggle with excess supply and weak demand. Businesses are still adapting their real estate strategies, and the long-term impact of hybrid work remains uncertain.

For now, the office sector appears to have reached a new equilibrium—one that is lower than in previous cycles but stable enough to support a more positive outlook than in recent years.

Source: CoStar News

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