The national outlook for the U.S. office sector has seen a minor upgrade by CoStar, driven by strong market signals in the third quarter of 2025.
Key Forecast Revisions
Vacancy Peak: The updated forecast indicates that office vacancy is likely very near, or perhaps already at, its cyclical peak. Its descent is now anticipated to begin in about a year, a significant shift from the previous expectation of the peak occurring in late 2026 or early 2027.
Occupancy Gains: The third quarter registered the strongest quarterly occupancy gains since 2019. Net absorption (the change in occupancy) turned positive for office buildings older than 10 years for the first time since 2018.
Absorption Outlook: The revised national forecast now anticipates a net increase of approximately 10 million square feet of office occupancy over the next four quarters, a substantial reversal from the prior forecast of a net decrease of 4 million square feet.
Rent Growth: Annualized rent growth is now expected to reach 1% by late 2026 and 1.5% by mid-2027, a more optimistic projection than previous versions.
Drivers of the Brighter Outlook
The improved performance is attributed to:
Strong Leasing Activity: The third quarter was characterized by robust leasing, paced once again by increased office demand in Manhattan, where financial services firms are among those still hiring and office attendance has rebounded well above the national average.
Anticipation of Higher Attendance: Many occupiers are committing to additional space based on expectations of higher employee office attendance, which is expected to boost absorption for several more quarters.
Limited New Supply: A generationally low amount of new office supply is expected, which will help the backfilling of existing buildings bring vacancy down faster.
Long-Term Challenges and Downside Risks
Despite the improved short-term outlook, significant challenges and risks remain:
Downside Risks: Short-term risks include persistent inflation, volatile trade policy, and recent preliminary revisions suggesting a weaker job market than initially reported, especially in knowledge industries. Local issues, such as the languishing entertainment industry in Los Angeles and reduced federal employment in Washington, D.C., are also limiting recovery in certain markets.
Structural Vacancy: In the long term, the outlook anticipates lower per-employee office space needs compared to pre-2020. As a result, office vacancy is expected to be structurally higher, remaining above 13.5% through the end of the decade (a full percentage point above the peak after the Great Recession).
Investment Appeal: The concentration of vacancy in non-competitive buildings, combined with limited new supply, is expected to support income and price growth for desirable buildings, which should help restore the attractiveness of office as an investible asset class.
