Office Space Demand Grew 19.8 Million Square Feet in Third Quarter
Min 1: All Four Census Regions Posted Positive Absorption
Office net absorption was negative in every one of four Census-defined regions—Midwest, Northeast, South, West—in second quarter 2025 but turned positive in every region in third quarter marking first time all four regions experienced demand growth since 2021. Breadth of turnaround supports case that most recent quarter could be start of more enduring trend of growing demand for office space. Technology and finance firms contributed significantly to leasing activity in 2025, powering New York City's standout performance with positive net absorption every quarter since mid-2024 and helping markets like San Francisco find bottom and begin recovery. Third quarter marks departure from recent past when positive absorption concentrated in few markets or one or two larger geographic regions. Sharp improvement in net absorption appears to signal beginning of recovery in office market according to NAIOP analysis.
Min 2: Fourth Quarter Forecast Calls for 20.5 Million Square Feet
Given current favorable economic conditions, large-scale capital expenditures related to artificial intelligence and performance of office market in past periods of moderate economic growth, net office space absorption in fourth quarter 2025 expected to be 20.5 million square feet according to forecast. Projection calls for another 50.5 million square feet of positive absorption for full year in 2026, with forecast projecting 28.4 million square feet of positive absorption for first three quarters of 2027. Current forecast assumes there is 50% chance recent increase in demand proves short-lived, in which case absorption would be lower than forecast. Office building access records show small gradual increase in office utilization reflected in consistent year-over-year growth since 2023 as well as continued bifurcation of demand favoring newer high-quality office buildings. Kastle Systems reports Class A-plus office buildings experienced near-full utilization on peak days while 10-city average for all office properties shows peak utilization at just below two-thirds of pre-pandemic average.
Min 3: Seattle and San Francisco Still Struggle with High Vacancy
Vacancy rates above national average of 18.5% in November in majority of Western U.S. markets surveyed according to CommercialCafe December office report. With exception of Los Angeles at 14.4% vacancy and Phoenix at 17.8%, all markets in group averaged vacancy rates above 20% last month. Seattle office space saw highest vacancy rate in region averaging 26.6% in November. San Francisco was second on list with vacancy averaging nearly 26% last month. Denver and California's Bay Area each had around 23% vacancies in local office sectors. With some support from performance across tech ecosystem around urban core, asking rents for office space in San Francisco topped regional list at little more than $65 per square foot in November—double national average of close to $33. Manhattan New York had highest listing rates in region at roughly $68 per square foot on average. Boston followed as second-priciest listing market in Northeast with asking rates averaging close to $49 per square foot.
Min 4: Austin Led Texas Markets with 27% Vacancy
Austin had highest vacancy rate in Southern region last month approaching 27% followed by Dallas at nearly 22% according to CommercialCafe tracking. Houston was only other Southern U.S. market in analysis to see vacancy higher than 20%. Three most popular Texas markets carried most of office pipeline in region—in November more than 2.6 million square feet of office space was in development in Dallas and little more than 1.5 million square feet under construction in Austin. Third-most productive was Miami, only other Southern market with more than 1 million square feet underway. Houston had roughly 1 million square feet of office space in development last month. Together office development in these four markets accounted for nearly 20% of national development pipeline total at start of December. Construction pipeline for new office developments down 20% year-over-year nationally as supply pressures ease through slowdown and repurposing conversions.
Min 5: Acquire Distressed Office at 40 to 50 Cents on Dollar
The office sector turnaround creates opportunity for investors acquiring distressed properties at deep discounts before recovery fully materializes. Office property values notched largest declines since commercial property values peaked in early 2022, falling 20.2% compared with apartments down 16.3% and retail down 8.4% while industrial at all-time highs up 1%. An investor who acquires Class B office building in recovering market like San Francisco or New York at 40 to 50 cents on dollar captures significant upside as absorption continues improving. Purchase 100,000 square foot office building originally valued $50 million now distressed at $25 million ($250 per square foot). Property currently 60% leased at $40 per square foot generating $2.4 million annual revenue. After operating expenses of $1.2 million, property generates $1.2 million NOI representing 4.8% return on $25 million purchase. Lease up to 85% occupancy over 24 months at $50 per square foot as market recovers generating $4.25 million revenue minus $1.7 million operating costs delivers $2.55 million NOI. At 6% cap rate, stabilized property worth $42.5 million representing $17.5 million gain on $25 million investment—70% returns over two-year hold period.
The Takeaway
Office space demand grew 19.8 million square feet in third quarter 2025 compared with negative 14.9 million square feet in second quarter marking strongest quarter for office sector since 2022 per NAIOP December forecast, though aggregate demand nearly unchanged from year ago up only 600,000 square feet as nationwide vacancy ticked up slightly to 11.9% from 11.7%. All four Census regions posted positive absorption in third quarter marking first time since 2021 as technology and finance firms contributed significantly to leasing with New York City showing positive absorption every quarter since mid-2024 while San Francisco finding bottom and beginning recovery. Fourth quarter forecast calls for 20.5 million square feet positive absorption with another 50.5 million square feet projected for full year 2026 and 28.4 million through first three quarters 2027, though forecast assumes 50% chance recent increase proves short-lived as Class A-plus buildings experienced near-full utilization while 10-city average shows peak at two-thirds pre-pandemic levels. Seattle and San Francisco still struggle with vacancy at 26.6% and 26% respectively while Western markets averaged above 20% except Los Angeles at 14.4% and Phoenix at 17.8%, though San Francisco asking rents topped region at $65 per square foot double national $33 average with Manhattan highest at $68. Austin led Texas markets with 27% vacancy followed by Dallas at 22% and Houston above 20% as three Texas markets carried 2.6 million, 1.5 million, and 1 million square feet under construction representing nearly 20% of national pipeline with construction overall down 20% year-over-year. Investors acquiring distressed Class B office in recovering San Francisco or New York markets at 40 to 50 cents on dollar—purchasing 100,000 square foot building at $25 million originally worth $50 million currently 60% leased generating $1.2 million NOI, leasing up to 85% at $50 per square foot over 24 months delivers $2.55 million NOI worth $42.5 million at 6% cap representing $17.5 million gain or 70% returns.
