New York has led the way toward an office recovery from the peak of COVID-19 worker isolation, but it is other cities — far from Manhattan and smaller in size — that have top commercial real estate executives talking optimistically in early 2025.
The leaders of large brokerages mentioned markets such as Pittsburgh, San Antonio, Minneapolis, Cleveland and Kansas City, Missouri, during recent calls with analysts to discuss fourth-quarter earnings.
A higher volume of new leases in these markets — in the final months of 2024, or in some cases throughout last year — is one hopeful data point as the industry tries to gauge when, or even if, there might be a broader office recovery from the pandemic that sent workers home in early 2020 and led to persisting remote and hybrid work trends.
“It feels like the office market has bottomed, and I think leasing velocity across markets is picking up,” Jeremy Leventhal, managing partner at Faros Properties, the owner of office buildings in New York, Boston and Pittsburgh, told CoStar News. “Companies are making decisions and making commitments to long-term office plans. We have a large pipeline of prospective tenants, and we expect 2025 to be a busy year.”
Across the United States, a spectrum of office landlords are pointing to a panoply of signals that the pandemic-battered office market is finally on the upswing. A broadened pool of tenants is signing longer lease terms, committing to more space and shedding flexible work policies in a move to get employees back to the office more regularly.
While the national office vacancy rate remains stubbornly high at 14%, tenants across roughly half of the country's 50 largest markets have helped push demand back into positive territory after years of record downsizing and move-outs. Top-tier cities such as New York are leading the rebound and setting the stage for a broader recovery, a shift now unfolding across some secondary and tertiary markets.
"We've seen the local and regional firms moving back to office space really quickly," Transwestern Executive Managing Director Russell Noll, a longtime San Antonio-based office broker, told CoStar News of the market's slow but steady momentum. "That's helped a lot with our demand, and since we're a market that has not experienced significant new construction, the flight-to-quality conversations have sometimes even resulted in companies moving to older buildings that have just been maintained very well."
Still, much of the turnaround chatter is based only on deals in recent months and anecdotal evidence of increased tours of properties by potential renters.
Road to recovery
While bright spots scattered across the national office market are a welcome boost for landlords and property owners scrambling to rebuild pandemic-era occupancy losses, there is still significant progress to be made in order to get many cities back to their pre-pandemic levels of demand.
Much of the recovery talk has focused on flashier markets such as New York or San Francisco given their size, concentration of corporate heavyweights and lineup of top-tier properties. Their reliance on specific industries or mandates has made it simpler to track their rebound progress, whereas it's a bit more opaque across markets such as Pittsburgh or Kansas City.
While deals have picked up lately in smaller markets, they don’t always fit into any obvious category, such as those with the greatest population growth. That adds to a lack of long-term clarity.
“It is unusual to have this degree of disparity in leasing performance across markets,” said Phil Mobley, CoStar’s national director of office analytics. “Usually, markets tend to move more closely together.”
Landlords, and the corporations that lease space from them, will also closely watch other factors such as interest rates, federal government cutbacks and the potential effects of President Donald Trump’s economic policies.
"We have definitely seen an uptick, and that has continued through the start of this year," Shawn Gulley, senior vice president of leasing and acquisitions at San Antonio-based Worth & Associates, told CoStar News. "San Antonio in general has never seen the big swings that some of the larger markets do, but lately we've seen a lot of companies that need to expand and an uptick in new prospects. We're at a good balance of supply and demand."
View from the top
Executives from major brokerages such as CBRE, JLL and Cushman & Wakefield have pointed to positive signs, such as an increase in the number and size of office leases, while also noting quirks.
JLL Chief Financial Officer Karen Brennan said the brokerage has seen the greatest growth in New York City and surrounding areas, as well as in Kansas City, San Antonio, Los Angeles and San Francisco, “so an interesting list of different markets there,” she said on the firm's earnings call.
“We are seeing some good momentum across both gateway cities and secondary markets,” she added.
CBRE’s chief financial officer, Emma Giamartino, highlighted activity in big cities such as Los Angeles, Chicago, Seattle and Washington, D.C., while also pointing to gains the firm’s brokers saw in Cleveland, Pittsburgh and Minneapolis in the final months of last year.
“That gives us confidence that office leasing will continue to increase as activity has spread broadly,” she said on her firm's earnings call.
Domino line of demand
The demand for office space has been building over the past several months as corporate heavyweights such as Amazon, Starbucks, Dell and Salesforce, among others, push for more stringent in-person requirements. The number of CEOs who believed their companies would adopt a full return to a five-day workweek climbed to about 85% from the 64% reported in 2023, according to a recent survey by accounting firm KPMG.
There also is a continued move toward higher-quality spaces, which has increased competition for remaining blocks and added urgency in some tenants’ searches, which also contributes to a healthier market, real estate professionals have said.
"A lot of the tenants we're hearing from are generally at the higher end of the market and are looking at the nicest buildings in the nicest locations," PwC Real Estate Partner Andrew Alperstein told CoStar News. "The problem is that all of these properties are already leased up at this point, so with limited new supply, where do these tenants go? There's no question there will be some trickle down in terms of quality, but it will take time."
As the demand for office space spills over into lower-tier markets and properties, office stakeholders are betting it will eventually reset the tenant-landlord power dynamics.
The market is “trending to more in-office attendance and the quality bias remains high, which means higher rents,” Cushman & Wakefield CEO Michelle MacKay told analysts.
Overall, JLL said occupiers of U.S. office space had their busiest quarter since the onset of the pandemic, leasing 52.9 million square feet collectively to reach a post-pandemic high for the third consecutive three-month period. That represented a 4.9% growth from the previous quarter and 17.6% increase year over year with fourth-quarter deal volume surpassing 92% of pre-pandemic quarterly averages.
Back to 'normalcy'
Property owners and real estate professionals in some secondary markets, where a smaller number of deals can move the needle, said they can feel the tide changing, albeit sometimes in small ways.
Brent Roberts, a Lee & Associates leasing broker focused on the Johnson County, Kansas, area of the Kansas City office market, said he has seen an uptick in deals and is seeing more long-term leases and renewals. But he said leasing remains hard work, including often sourcing new tenants himself rather than working with tenant brokers.
“You don’t put up a sign and wait anymore,” Roberts said. “You’ve got to go find the tenants. But the deals have been getting bigger the last two years. We’re seeing more full-floor deals.
“It feels like there’s some momentum. I think this year will be better than 2024, and hopefully by 2026 we’ll have normalcy. But there’s still a lot of vacancy to fill throughout the market.”
Faros Properties’ Leventhal is encouraged by recent huge leases with Duquesne Light and Allegheny Health Network in his firm’s sprawling Nova Place in Pittsburgh. But he noted it is an unusual complex with a mix of traditional office space, data storage and robotics uses.
Still, he said, Faros is seeing more leasing activity at the complex than at any time in the decade the firm has owned it, including pre-pandemic. Tenants seeking space in Pittsburgh and other markets are from a wide range of industries, too, he said.
Return-to-office mandates and a recognition of the value of in-person collaboration are key factors, Leventhal said.
“Everybody was forced to work remotely for a period of time during COVID,” Leventhal said. “There was a lot of exploration, and no one wanted to make a mistake on a long-term decision. Ultimately, I think people have come to realize that [remote work] experiment is not as effective as having an office, having collaboration and building a culture. That’s happening nationally.”
CoStar News Senior Staff Writer Randyl Drummer contributed.