4. Office

• Investors are returning to the sector, betting on selective redevelopment and amenity-driven differentiation, amid market repricing.

• Overbuilding in urban cores and continued space shedding by large occupiers have slowed the recovery of central business districts, even as suburban markets stabilize.

• The sector’s recovery hinges on policy support for adaptive reuse, new capital targeting transit-accessible assets, and an industry-wide acceptance that office demand is evolving, not disappearing.

The office market is finding a new normal after years of steady increases in vacancies and declining transaction volume. Major cities, such as San Francisco and New York, that had been written off in the wake of COVID, are now leading the recovery with stronger leasing activity. Some brokers report that trophy buildings across Miami, New York City, San Francisco, and other markets have captured all-time high rents. Urban office prices, down 50 percent from recent peaks, are now enticing investors to bet again on the sector, with dramatically lower cost bases helping offset the higher costs of de rigueur amenities in new buildings.

Even as investment volumes strengthen and leasing activity firms, however, there are still headwinds facing the sector. Large occupiers are continuing to right-size their footprints, which has resulted in continued negative absorption and rising vacancy rates. Distressed sales have been increasing as conversion of functionally obsolescent buildings to other uses is not a practical solution for many owners for both financial and physical reasons.    

The office market may be back, but with a whole new set of considerations for occupiers and investors.  As one researcher noted, occupiers and investors are learning to live with the uncertainty—which, for now, looks here to stay. 

While the market faces challenges, not all perceived hurdles are real. One of the most prominent misconceptions is the narrative of unsafe cities. Crime has fallen dramatically, and a renewed sense of safety—which previously had been a barrier to return-to-office (RTO) policies—no longer threatens the revival of many downtown areas. 

But safer streets are only one factor weighing on occupiers’ leasing decisions: employers must consider the outlook for workforce expansion. There is widespread agreement that artificial intelligence (AI) firms, particularly in San Francisco, have been a positive source of leasing momentum: in Q2 2025, more than 55 percent of venture capital dollars went to firms in the AI and machine-learning verticals, for example. However, there is significant concern over the impact that AI will have on knowledge workers and in turn, office occupancy, with one leasing broker noting the potential for AI to also permanently “delete” jobs. One optimist pointed to the potential for more rapid firm creation that could eventually lead to demand for incremental office space, but to date, technology jobs have been contracting. 

Since the post-COVID peak, the technology sector (defined as jobs in the information and computer systems design industries) has shed nearly one-quarter of a million jobs, or 4.4 percent from 2022 peak levels. (Office-using jobs have fared only modestly better, standing 1 percent lower than the peak reached in April 2023.) Coupled with a preliminary benchmark revision showing that the level of nonfarm employment in March 2025 was over-estimated by more than 900,000 jobs or 0.6 percent, the demand backdrop for office space looks to be approaching 2026 from a position of weakness. Importantly, many of the metro areas with a substantial concentration of tech jobs are where the declines in tech employment have been greatest, including San Francisco, Seattle, and San Jose, where tech employment (at its recent peak) as a percentage of total employment comprised 11.1 percent, 14.5 percent, and 17.2 percent, respectively.   

Despite a lackluster employment backdrop, some firms have been expanding their physical footprint—even if the firms planning to add space have been smaller firms with smaller space requirements.  According to Newmark, 69 percent of office tenants in the market plan to maintain or expand their footprint, even as the average lease size is down by about 12.5 percent from pre-pandemic levels. Another head of occupier research similarly noted a decline in average lease sizes, even as the number of leasing transactions is up. Major occupiers (defined as those with more than 10,000 employees) are still trying to right-size their spaces—one reason that net absorption continues to be negative. By one brokerage’s calculations, net absorption has been flat or negative for 14 straight quarters, although the pace of contraction has slowed.   

Occupiers are learning more about their space utilization, and for those with a hybrid work policy, many are no longer designating a dedicated seat for each employee; instead, they are designating “neighborhoods” of desks for teams with communal areas where different teams can come together. Coordinating the space needs of different teams to ensure sufficient space for workers on their “in-office” days may soon become its own role. Says the occupier research head: “We’re teasing the idea of a chief places officer, where you have somebody who is worried about the intersection of people and place. The workplaces that truly have an innate purpose are the ones that are actually achieving better occupancies right now.”

Employers have taken a “carrot” rather than “stick” approach to return-to-office (RTO) policies. According to CBRE’s Americas Office Occupier Sentiment Survey, while compliance with attendance policies was up 12 percentage points in 2025 versus a year prior, only 72 percent of organizations reported achieving attendance goals, and just 37 percent of survey respondents took actions to enforce adherence to in-office work.   

In the face of lackluster attendance, some employers are seeking enhanced amenities to offer an elevated workplace experience that mimics features found in luxury hotels and upscale tourist destinations. A leasing director for a major office owner put it this way: “There’s certainly an arms race in New York City to amenitize buildings.” For many landlords, it’s no longer sufficient for a building to have its own gym. Instead, the latest offerings are “spa-quality wellness centers” with a “fit and finish as if you were in a Four Seasons hotel”—complete with private trainers, massage rooms, and locker rooms worthy of a country club. Michelin-starred chefs are behind new lunchtime offerings, and some landlords are exploring high-end food hall installations. Even the office building’s roof deck is no longer sufficient; one landlord spoke of their “clubby” glass-ceiling rooftop space and oversized terrace that is used by tenants during the day and rented out for private events in the evenings by non-tenants.

After years of elevated vacancy and costly refinancings amid higher interest rates, many landlords do not have the deep pockets to reposition their buildings, and a dearth of new construction over the past few years means that large blocks of trophy-caliber space are no longer available. (The president’s July 2025 tax bill that made qualified tenant improvements 100 percent deductible may help improve some second-generation buildings, however.) Instead, many B quality buildings are suddenly finding themselves attractive to occupiers who would otherwise opt for higher quality space. Given the financial challenges for developers post-COVID, just over 27 million square feet of space are under construction according to JLL—matching the lowest levels of new supply since the Great Financial Crisis (GFC). Employers who anticipate any headcount growth in the next few years cannot depend on a stream of new trophy quality deliveries to meet demand, which is one reason space that was described by one broker as “best of the rest” is performing well, particularly against the backdrop of declining sublease space. This concern was echoed in CBRE’s occupier trends survey findings, where nearly half of all respondents expressed concern about the availability of good-quality, well-located space, despite historically high vacancy rates. 

Rather than a split between trophy versus all other space, there’s been a trickle-down effect where tenants are opting for space that is “next best.” Even without the luxury hotel–caliber amenities, however, one emerging shift is the desire for flex space. Taking a page from pre-pandemic co-working providers, landlords are now offering shared workspaces directly to their building tenants. From large conference rooms with catering options to overflow space for individual work (albeit in a group setting), these space options have been key in attracting tenants—enabling them to access more space on an as-needed basis, rather than paying for extra space that may be infrequently used.    

The office market has clearly turned a corner, but the path ahead won’t be linear. While vacancy rates have continued to climb, one reason that the outlook is likely to improve is due to base effects: nearly empty buildings are being removed from inventory due to obsolescence. A leasing director for a major office landlord referred to these buildings as “zombies” and noted that, in many cases, it would be more cost-effective to tear down the building and rebuild from scratch instead of repositioning the existing structure. Lenders, too, may prefer buildings with the “lights out.” Given the operating complexities of office high-rises, one capital markets broker commented that building management and lease-up by lenders were “never the business model . . . so it’s much easier to let the building go ‘zombie’ and then trade it.” 

This tacit acknowledgement—that time may not heal all “wounded” buildings—is a positive sign for the sector’s recovery, but looking ahead, implies that vacancy rates have further room to rise. Municipalities have begun to focus on innovative programs that incentivize office-to-residential conversion (conversions in Chicago’s LaSalle Corridor are one notable example) but economic aid to offset elevated construction and financing costs is only one part of the equation. One broker pointed to the need for “massive rezonings,” which could be a lifeline for underperforming assets—particularly those not located proximate to transit hubs. “People will live in places they will not work,” said the broker, commenting that transit access remains key for employees, the large majority of whom commute. 

Despite predictions that the “hub-and-spoke model” for office—a larger CBD office surrounded by smaller, suburban satellite offices—would accelerate in the wake of COVID as employees moved further away from the workplace, such forecasts have failed to materialize. As one research head noted, the centrally located office that’s “equally inconvenient for everybody” still prevails.   

Nonetheless, suburban offices seem to be in a stronger position than their urban counterparts. Occupied stock, on an indexed basis, was flat to modestly higher for suburban offices of both class A and class B/C between Q1 2021 and Q2 2025 while CBD office occupancies contracted over the same period.  Reflecting the greater weakness of the urban office market, post-COVID price levels (which hit a low only in Q1 2025), saw a 50-percent peak-to-trough price decline for CBD office assets versus just 19 percent for suburban office assets, in contrast to the price performance of office during the GFC, where prices for urban and suburban office space fell by approximately the same amount (38 and 41 percent, respectively). As Cushman & Wakefield points out, the much larger pipeline of new office construction underway in CBDs versus suburban areas early in the pandemic combined with greater space shedding by larger firms in CBDs during the pandemic means that CBD vacancy rates will come down more slowly than suburban vacancy for several more quarters. 

The delinquency rate of office commercial mortgage-backed securities—at 11.66 percent in August 2025—represents the sector’s worst-ever level, and a full percentage point above even the GFC peak, according to Trepp. Distressed office sales as a fraction of total office sales are at their highest levels in more than a decade. The most severe price corrections may be behind us but select distress will continue, particularly as 49 percent of office leases in place in March 2020 (10,000 square feet and above) have yet to roll over. However, price corrections have opened the door for new capital. CBD office buildings with strong transit access and modern amenities are emerging as the clearest winners. For tenants, landlords, and city policymakers alike, the task ahead is to balance realism with reinvention—recognizing that office demand is evolving, not disappearing, and that long-term value will flow to those who recalibrate, rather than retreat.