Office Market May Be Entering a “Normalization” Phase

The NAIOP Research Foundation today released its newest office market forecast, revealing that national demand for office space surged in the third quarter of 2025 – a sharp reversal from earlier in the year that may signal the beginning of a broader market recovery. The report, “Office Space Demand Forecast, Fourth Quarter 2025,” analyzes current market dynamics, economic conditions and trends shaping office utilization across the U.S.

According to the study, nationwide net absorption grew by 19.8 million square feet in the third quarter, a notable increase from the 14.9 million square feet of negative absorption recorded in the previous quarter. This marks the strongest quarter for office space demand growth since 2022. Still, demand remains nearly flat year-over-year, increasing by only 600,000 square feet, as early 2025 saw declining leasing activity.

“While the third quarter’s rebound is a promising sign, the office market remains at a pivotal ‘normalization’ point,” said Marc Selvitelli, CAE, president and CEO of NAIOP. “Firms are making more deliberate, long-term decisions about their space needs, and this report underscores the complexity of those decisions in the current economic climate.”

Key Findings

• Broad-based improvement: For the first time since 2021, all four U.S. Census regions posted positive net absorption in the third quarter, compared with uniformly negative demand in Q2.
• Construction slowdown easing pressures: Only 25.3 million square feet of net new office space was delivered nationwide over the past four quarters, while more buildings are being repurposed for residential, hospitality and data center use.
• Vacancy rates edged up slightly, rising from 11.7% to 11.9% year-over-year, even as demand strengthened.
• Tenant preferences continue to bifurcate the market: Class A+ buildings are nearing full utilization on peak days, while overall office utilization remains below two-thirds of pre-pandemic levels.

Looking Ahead

The forecast projects 20.5 million square feet of positive net absorption in the fourth quarter of 2025, followed by 50.5 million square feet for the full year in 2026. Another 28.4 million square feet of absorption is expected in the first three quarters of 2027. However, the model assumes a 50% likelihood that the recent surge in demand is temporary, driven partly by delayed leasing decisions earlier in the year.

“Much of the near-term outlook hinges on macroeconomic factors, including federal policy decisions, investments in data centers and consumer spending patterns,” said Selvitelli. “The next several quarters will determine whether this momentum represents a true turning point or a short-lived rebound.”

Economic Influences

The report finds the overall U.S. macroeconomic outlook is cautiously optimistic but vulnerable to several risks: recent federal government closures, uncertainty surrounding tariff and health care policies, declining consumer sentiment and questions about how AI will reshape the labor market.

At the same time, rate cuts by the Federal Reserve have strengthened the economic outlook. Lower borrowing costs are expected to support office market activity by making it easier for owners and tenants to strike deals that include capital improvements — a key driver of leasing decisions.

About the Forecast Model

The NAIOP forecast model analyzes historical economic data and office absorption trends to project future demand. While office occupancy per worker remains below pre-2020 levels, recent absorption patterns suggest that office performance is beginning to more closely mirror past economic cycles.

The report is authored by Hany Guirguis, Ph.D., dean, O’Malley School of Business and professor, economics and finance, Manhattan College, and Joshua Harris, Ph.D., executive director, Fordham Real Estate Institute, Fordham University.

Download the full NAIOP Office Space Forecast: naiop.org/officedemand