U.S. Office Market Q1 2025: Leasing Surges, But Vacancy Still Looms
The U.S. office market showed promising signs of recovery during Q1, with increased leasing activity and renewed investor interest signaling a potential turnaround. However, high vacancy rates and economic uncertainties continue to diminish a full rebound.
Leasing activity surged, reaching 115 million square feet of office space leased in Q1 2025—the highest quarterly volume since 2019. This uptick reflects growing tenant confidence, especially in prime locations. Despite this positive trend, net absorption remained negative, as more space was vacated than occupied. Contributing factors include federal lease terminations and a rise in available sublease space.
National office vacancy rates remain a concern. According to Moody's, the vacancy rate rose to 20.4% in Q1 2025, up from 19.8% in Q1 2024, highlighting the sector's struggle to adapt to hybrid work models and evolving tenant needs. However, some markets demonstrated resilience. In Manhattan, the overall availability rate fell to 17.3%—the lowest since 2020—fueled by strong demand for trophy properties.
Investor confidence in the office sector is on the rise. Office building sales volume grew by 20% in 2024, totaling $63.6 billion, a clear sign of renewed optimism. Foreign investors are also showing heightened interest, with expectations of increased acquisitions in 2025. Manhattan led the nation with $1.8 billion in office sales, reinforcing its status as a top investment destination.
New office construction remains limited, with only 3.5 million square feet delivered in Q1 2025—the lowest in over a decade. High construction costs and economic uncertainty are key factors behind this slowdown.
Meanwhile, office-to-residential conversions are accelerating, with a notable rise in such projects since 2021. These conversions aim to repurpose outdated office spaces to meet the growing demand for urban housing.
The office market's recovery remains uneven. High-quality, amenity-rich spaces in prime locations are seeing strong demand, while older, less adaptable buildings struggle to attract tenants. The path forward remains uneven, but one thing is clear: tenants and investors alike are redefining what the modern office means in a hybrid world. Markets that adapt fastest will emerge strongest.
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