Major office landlords, after a cautious start to the year, are now shedding some of their wariness as leasing momentum across the country heads back to pre-pandemic levels.
Some of the nation's largest owners, such as Piedmont Office Realty Trust and Highwoods Properties, are reporting an amount of leasing not seen since COVID-19 sent workers home and upended demand for the office sector.
Data backs this up. A CoStar analysis shows new leasing volume in the first three months of the year neared 2019 levels, providing "the clearest signal yet that the office market has at last entered the recovery phase." Construction starts are at historic lows, limiting the building supply and leading executives to expect that a national vacancy rate that remains at a record high of 14% will eventually head lower.
As a result, some landlords are boosting their outlooks for the remainder of the year as tenant demand for space continues to build, pointing to longer-term and larger deals. Part of that still high vacancy rate can be attributed to tenants flocking to certain types of property: new and modern buildings are still outperforming their older counterparts, or those without the fancier bells and whistles like high-end gyms and rooftop bars.
Atlanta-based Piedmont reported year-to-date leasing volumes surpassing 850,000 square feet, with more than half signed since the start of the second quarter. Of the half a million square feet it has leased out over the past two months, executives of the real estate investment trust said about 70% has been new deals set to fill currently vacant space, a milestone that will lend a hefty boost to the company's portfolio occupancy.
All that activity has landed "despite the turbulent economic backdrop," Piedmont CEO President Brent Smith said in a statement about the landlord's leasing progress. "To date, we have not witnessed a slowdown in leasing demand or decision making [and] Piedmont's client pipeline remains robust."
Piedmont's outlook echoes recent comments made by some of its counterparts such as BXP, Hudson Pacific Properties, Vornado Realty Trust, Kilroy Realty and Highwoods Properties that have said there has been no drop-off in leasing momentum or pullback in deals, a sign that companies are investing in growing their real estate portfolios alongside escalating office mandates.
The highest-end offices in major markets are exceeding 90% of pre-pandemic use on peak days, according to a midyear report from building security firm Kastle Systems. That use reaches 94% on Tuesdays, the top day for in-person work.
Demand edges higher
Sun Belt-focused landlord Highwoods Properties also reported a spike in leasing since the start of the year, inking more than 750,000 square feet of deals since the beginning of April, activity that CEO Ted Klinck said signals tenants' increasing focus on premium, well-located office spaces.
Piedmont, with a portfolio that spans about 16 million square feet, has raised its annual leasing forecast to as much as 2 million square feet by year-end 2025, a significant bump compared to its initial guidance of 1.4 million square feet to 1.6 million square feet.
What's more, a number of office owners have pointed to a lengthening pipeline of leases working their way through late-stage negotiations. If realized, those pending agreements will result in a significant spike in occupancy rates, one of the last hurdles landlords have faced in their own post-pandemic recoveries.
"The healthy volume of leases executed in the first five months of the year and pipeline of future prospects positions us to grow occupancy late in 2025 and thereafter," Klinck said in a statement to CoStar News.
To be clear, the overall health of the office market falls into two distinct camps: a stable and strengthening premium segment versus a struggling and financially stressed lower-tier one. The owners behind portfolios of high-end office space have benefited as vacancy rates for the upper tier of the segment are about 13% compared to roughly 19% for the rest of the market, according to CBRE data.
While companies leased more office space during the first three months of 2025 than in any quarter since 2019, those deals still remain smaller than pre-pandemic averages. Lease sizes are currently about 15% smaller than deals seen between 2015 and 2019, CoStar data shows.
"Smaller occupiers continue to upgrade their spaces, while larger ones tend to stay in place, enabled by slower headcount growth and constrained by an increasing lack of large-block availabilities in premium buildings," the report said.
Market volatility and opaque tariff resolutions could curb the outlook of tenants and result in them pulling back from real estate commitments. Landlords, especially those behind older and financially challenged properties, could face even greater hurdles in filling their spaces, and the high cost of capital could prevent many from making the investments they need to reposition their buildings.
Strong leasing
Even so, the lingering effects of the pandemic and mounting economic uncertainty have yet to hamper the momentum building across the upper slice of the nation's office market.
The increasingly positive outlook is also beginning to create a foundation for other decisions and investments office stakeholders are making to position themselves for long-term growth.
Highwoods and Cousins Properties are both investing heavily in upgrades to their existing portfolios, while BXP recently broke ground on one of the only office buildings under construction in the Washington, D.C., area.
Tishman Speyer, the owner of Manhattan's iconic Rockefeller Center, also recently closed on its first office acquisition since 2019, dropping nearly $106 million on a fully leased building in New York's SoHo neighborhood.
The deal for the property at 148 Lafayette St. was made to "capitalize on the strengthening New York City office leasing environment," Albert Schmool, Tishman Speyer's managing director, said in a statement.