REAL ESTATE NEWS

National demand for office space surged in the third quarter, with demand growing across the nation, suggesting the beginning of a potential market recovery after slower activity earlier in 2025.

According to a report from the NAIOP Research Foundation, net absorption grew by 19.8 million square feet, a dramatic swing from the 14.9 million square feet of negative absorption recorded in the previous three months. Despite the quarterly rebound, overall demand remains largely flat year-over-year, increasing by only 600,000 square feet, as leasing activity performance was poor during the first half of the year.

But most importantly, for the first time since 2021, all four U.S. Census regions, the Northeast, Midwest, South, and West — posted positive net absorption in Q3, compared with uniformly negative demand in Q2, while previously growth was concentrated in a few large markets.

The improvement has been supported by slower construction and the repurposing of some older office buildings for residential, hospitality and data-center use. Only 25.3 million square feet of net new office space was delivered nationwide over the past four quarters, easing supply pressures. Vacancy rates edged up slightly, from 11.7% to 11.9%, even as demand strengthened. The market remains bifurcated, with tenants gravitating toward Class A+ buildings, which have approached full utilization on peak days, while overall office occupancy remains below two-thirds of pre-pandemic levels.

Leasing activity has been concentrated among technology and finance firms.

Regionally, New York City leads the way in demand, recording positive net absorption every quarter since mid-2024 and markets such as San Francisco appear to have found a bottom and have started their recovery. Investment in artificial intelligence has driven some companies to expand office footprints, particularly in markets that host large firms or startups pursuing tech-related operations.

Looking ahead, NAIOP projects 20.5 million square feet of positive net absorption in Q4 2025, followed by 50.5 million square feet for full-year 2026. Another 28.4 million square feet is forecasted for the first three quarters of 2027. However, the report cautions that the recent surge may be temporary. The forecast model assumes a 50% probability that the increase in net absorption reflects a durable shift rather than delayed leasing that would have occurred earlier in the year.

“Firms are making more deliberate, long-term decisions about their space needs,” said Marc Selvitelli, president and CEO of NAIOP. “The next several quarters will determine whether this momentum represents a true turning point or a short-lived rebound.

Source: GlobeSt/ALM