Market Observations
- Labor Markets: Since February 2020, new office-using jobs have generated an estimated 344.6 million SF of office demand—partially offsetting the impact of hybrid work. Still, sustained job growth remains essential to a full recovery in office markets. While office-using employment continues to expand, growth has flattened since 2023, largely due to underperformance in the tech sector. Among the top 50 office markets, 34 recorded gains in office-using employment over the past six months, with 23 of those markets posting faster growth than in the prior six-month period.
- Hybrid Work Transition: Slower job growth increases office markets’ exposure to demand shifts driven by hybrid work. Newmark estimates that 49% of pre-pandemic leases remain unrenewed, including 1.4 billion SF scheduled for renewal between 2025 and 2027. Average lease sizes have also declined by 11.6% from pre-pandemic levels, signaling potential ongoing reductions in demand. However, Newmark’s tenants-in-the-market data shows that 67% of tenants plan to either maintain or expand their footprints at renewal. As a result, the outlook is less dire and points to a gradual recovery.
- National Trends: Although momentum appeared to shift in the fourth quarter of 2024—when occupancy improved after 18 consecutive quarters of net losses—occupancy declined by 729,411 SF in the first quarter of 2025, representing just 0.01% of national inventory. Leasing activity rose in more than half of tracked markets, with national leasing reaching 1.2% of inventory, slightly above the prior year’s quarterly average of 1.1%. National vacancy remained relatively stable quarter-over-quarter and rose only 30 basis points year-over-year to 20.4%. The construction pipeline contracted to 30.9 million SF, down more than 20.0 million SF from the first quarter of 2024. As availability tightens, especially in the trophy segment, rent growth is expected to emerge first in that tier and potentially extend to the next level of building quality and location.
- Regional Trends: The Central and East regions were the only areas to post occupancy gains in the first quarter of 2025, led by Chicago (+1.2 MSF), New York City (+820,921 SF) and Northern New Jersey (+655,647 SF). In contrast, the South and West recorded a combined net loss of 3.5 MSF during the quarter. As leasing activity continues to rise—especially in higher-tier properties—net absorption is expected to strengthen across regions and market sizes in the quarters ahead. The South accounts for 40% of the under-construction inventory, much of which is scheduled for delivery by year-end 2025.
- Rent Trends: Asking rents rose 1.0% year-over-year in the first quarter of 2025, with stronger gains seen in secondary and tertiary markets (+3.6%) and the South (+3.0%). However, elevated concessions continue to pressure effective rents, with tenant improvement (TI) allowances now averaging 61.1% above pre-pandemic levels across leading office markets. One reading of flat nominal rents is that part of the market reset has been absorbed through inflation—producer price index (PPI)-adjusted office rents are down 16.3% since the first quarter of 2020.
- Class Conundrum: Class performance continues to show more nuance than the typical flight-to-quality narrative suggests. In CBD markets, higher-quality product has led performance since early 2020. While availability rates for Class A and Class B space are comparable overall, post-2019 Class A developments stand out with notably lower availability. Since early 2020, Class B asking rents have risen meaningfully, while Class A rents have declined—with rents for post-2019 deliveries landing between the two. Outside CBDs, properties have generally outperformed their urban counterparts. Notably, Class B suburban assets now exhibit lower availability than Class A properties in both CBD and non-CBD locations. Availability for Class B space matches that of new CBD construction and is well below new non-CBD product.
