The US office market continued to build momentum after turning a corner in the second quarter after five straight quarters of negative net absorption. During the third quarter, the office market posted 4.9 million square feet of positive net absorption following 1 million square feet of positive net absorption during the second quarter.
Given this momentum, net office space absorption in the fourth quarter is expected to reach 9.4 million square feet followed by 10.8 million square feet of positive net absorption in 2025, according to NAIOP’s fourth quarter office demand forecast. The risk of recession appears to have diminished, and it is possible recent positive absorption can be attributed to structural improvement in demand that could persist over the next two years, the organization said.
NAIOP relies on historical net absorption data from CoStar to develop its forecast.
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NAIOP pointed to sustained outperformance of the macroeconomy and jobs market as well as stricter return to office requirements among some prominent firms as contributing to the office market momentum. However, many pre-pandemic leases have yet to reach renewal, so it remains to be seen if there has been a sustainable increase in occupiers’ appetite for space, said the report.
“Recent data should be seen as an encouraging sign that demand for office space has begun to stabilize, but anemic demand growth has yet to catch up with new construction,” said the report.
CoStar’s data indicates 17 million square feet of new space was delivered during the second and third quarters of 2024, which resulted in an increase in the average vacancy rate from 11.7% to 11.8%. That pace of new deliveries was slower than during the same period in 2023, when 27.1 million square feet delivered. If new office construction continues to outpace demand next year, the average vacancy rate will continue to rise, the report said.
Another question mark for the office market is the economic and fiscal policies that may emerge from the new presidential administration and Congress.
“Early indications from equity markets suggest higher levels of business optimism that may translate to higher demand for office space,” said the report. “Conversely, higher medium- and long-term interest rates could place a damper on occupiers’ ability to expand and make capital investments.”
A potential requirement that federal workers increase their office attendance could boost utilization rates, but that increase in demand could be offset by budget cuts within some federal agencies, the report said. Meanwhile, the economy appears to be experiencing a soft landing and most market participants believe inflation has been tamed. However, a recession in 2025 can not be ruled out, said NAIOP.
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
