2025 Office Real Estate Market: Is Recovery Finally Here?

According to various CRE outlooks, the sector is expected to see improvement this year. There is high demand for Class A buildings, while leasing rates are rising. Additionally, some large corporations are implementing a five-day return-to-office (RTO) policy. These factors indicate 2025 will be a recovery year for office real estate. ?

Office Real Estate Trends: Signs of Gradual Improvement??

CBRE forecasts a resurgence in office activity across most central districts, with a decrease in overall vacancy rates expected in 2025. The continuous revival and demand for office assets are supported by strong stabilizing indicators, such as:?

1. Increased leasing activity: The tenant pipeline across the 11 largest office markets grew 4% in the first three quarters of 2024, reaching 125.3 million square feet. This is an improvement over the same period in 2023. Additionally, the average lease size has expanded to 29,875 square feet over the past two quarters, a significant increase from the typical 10,000 square feet.?

According to Avison Young, available office space for lease and sublease stood at 23.4% as of Q4 2024. This marks the second consecutive quarterly decline, a trend not seen since late 2019. Throughout 2024, office leasing activity totaled 290 million square feet, reflecting an 11.6% drop from the pre-pandemic annual average of 328 million square feet. Additionally, available sublease space decreased by 80% between Q3 2023 and Q3 2024, with Chicago experiencing the largest decline at 19%, followed by Seattle at 17% and Dallas at 15%.?

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2. Stable space demand per worker: The demand for office space per employee reached 146 square feet in 2024, approaching the pre-pandemic average of 161 square feet. This growth is largely attributed to the widespread return-to-office mandates.?

3. Investor expansion strategies: According to CBRE’s Office Occupier Sentiment Survey, 40% of respondents plan to expand their office portfolios, while 25% intend to maintain their current holdings—signaling confidence in the sector's recovery.?

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4. Positive net absorption trends: Office space absorption rose in Q2 and Q3 of 2024, totaling 2.3 million and 4.3 million square feet, respectively.?

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5. Limited supply of new office buildings: The supply of new Class A office buildings remains tight, with construction activity down 74% from Q1 2020 to Q3 2024. Additionally, many large office properties have already been repurposed or are scheduled for conversion, further constraining availability.?

Office Market Challenges Persist, but Select Metros See Positive Trends?

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In recent months, companies like Amazon, AT&T, Bank of America, Sweetgreen, Walmart, Dell, and the Wall Street Journal have announced RTO mandates for their employees. As of January 2025, Amazon, AT&T, and Dell have required employees to return to the office five days a week. JPMorgan, the largest bank in the U.S., is the latest company to adopt this policy, according to a Bloomberg report.?

Despite the push for RTO, the widespread adoption of remote and hybrid work arrangements continues to challenge the sector's full recovery. Moody's CRE data shows that office sector vacancy rates reached 20.4% in Q4 2024, marking a 0.8% increase for the year. The hardest-hit metro areas include San Jose (+3.8%), San Francisco (+3.4%), Portland (+2.9%), Phoenix (+2.8%), Louisville (+2.7%), and Denver (+2.7%).?

However, Amazon reportedly could not entirely implement its RTO policy in January 2025 due to lack of available office space for its workers in seven cities, including Phoenix, Austin, and Dallas, despite announcing the policy in September 2024.?

Likewise, several metros reported positive net absorption figures in Q4 2024. Leading markets include Atlanta with 1.4 million square feet, followed by Tampa-St. Petersburg at 1.0 million square feet, Northern New Jersey with 825,000 square feet, Miami at 773,000 square feet, and Houston with 744,000 square feet.?

Outlook for Office Real Estate?

The outlook for office real estate in 2025 appears more promising as RTO mandates gain traction among major companies. While these developments signal positive momentum, they should serve as motivation rather than the sole basis for investment decisions. Industry reports suggest that the success or struggle of office real estate largely depends on localized market conditions.?