Finally Some Good News For the Office Market? Positive Net Absorption

After years of unprecedented challenges, the office market might finally be stabilizing. For the first time in years, net absorption of office space turned positive in the second and third quarters of 2024, breaking a five-quarter streak of declining demand. This trend gained momentum in Q4, setting the stage for cautious optimism across the sector.

Markets are beginning to recalibrate as tenants return, construction slows, and macroeconomic optimism fuels renewed interest in office leasing. However, this recovery remains uneven, with gains concentrated in select markets and industries while others still grapple with high vacancy rates and depreciating property values. Read on to understand how these trends affect current tenants and the future of the office sector. 

In this article, you’ll learn:

• What’s driving the recent turnaround in net absorption?
• How stricter return-to-office policies are reshaping workplace demand.
• Why tech companies and AI are pivotal in reviving leasing activity.
• The macroeconomic factors bolstering growth—and the risks ahead.

Positive Net Absorption in Office Sector

The battered office market may finally be catching its breath. Recent data reveals a trend that hasn’t been seen in years: positive net absorption of office space.

After enduring record-high vacancy rates and plummeting property values, the numbers suggest a long-awaited shift in demand.

CoStar reports that the office market absorbed 9.4 million square feet of office space in the final quarter of 2024 alone. This momentum is expected to sustain through 2025, with projections of another 10.8 million square feet for the full year. The trajectory remains optimistic into 2026, with 3.9 million square feet of absorption forecasted for the first three quarters.

Of course, these numbers are to be taken with a grain of salt. It’s essential to recognize that this recovery is not uniform.

The positive absorption numbers are heavily concentrated in specific markets, primarily those benefiting from tech expansion and a strong post-pandemic rebound. Secondary markets and older Class B and C properties still face significant headwinds.

Regardless, many CRE professionals are gladly accepting the first positive news to come to the office sector in half a decade. A report by the National Association for Industrial and Office Parks (NAIOP) discusses the expansion of the tech industry as a focal point for this positivity.

So, let’s take a closer look at why the tech industry could be the anchor for future success in the office industry.

The Rise of Tech Leasing

Artificial intelligence (AI) is driving a seismic shift in office leasing demand. According to the Wall Street Journal, "Technology companies’ leasing of office space jumped in the third quarter to its highest level in nearly three years, reflecting the growth of artificial-intelligence firms and job growth in the tech industry."

This growth is not just anecdotal; the numbers back it up. The tech sector’s share of overall office leasing rose from 9% at the end of 2022 to 13% by mid-2023. As of today, tech commands an impressive 21% of all office leasing activity.

Tech’s Big Moves: NVIDIA and Beyond

Leading the charge are massive companies like NVIDIA.

Now as the world’s second most valuable company behind Apple, estimated to be worth over $3 trillion, recently signed a 100,000-square-foot, full-building lease in San Francisco.

This is emblematic of a broader trend: AI startups are taking root in major hubs like San Francisco, Silicon Valley, and Boston. In San Francisco alone, more than 25 AI firms were seeking one million square feet of office space as of August 2024.

Reviving the Ghost Towns

Tech leasing is breathing life into areas that were once written off as casualties of the "office apocalypse."
San Francisco, a city synonymous with the pandemic-era office exodus, is now seeing a resurgence as AI companies capitalize on its prime location, talent pool, and steep property devaluations.

A Perfect Storm for Tech Opportunity

The current environment is ripe for tech-driven expansion:

• Venture Capital Influx: AI startups are attracting record funding, enabling them to secure large-scale leases.
• Fire Sale Properties: Office devaluation has created opportunities for well-capitalized tech firms to acquire space at a fraction of its previous cost.
• Talent Magnet Hubs: Proximity to leading universities and tech talent in cities like Boston and Silicon Valley remains critical.
  
  

Cautious Optimism for the Future: Balancing Supply & Demand

While the overall office market continues to grapple with systemic challenges, the tech sector’s resurgence signals that certain markets and industries may recover faster than others. For landlords and corporate tenants alike, the rise of AI and its spillover effects on tech leasing represent a pivotal moment to recalibrate strategies in the post-apocalyptic office landscape.

It’s also worth mentioning that the rise in absorption has been in accordance with much lower construction rates. With fewer developments hitting the market, the office sector was able inch toward a healthier balance between supply and demand.

However, the ongoing completion of pre-pandemic projects has nudged already-high vacancy rates slightly higher, underscoring the delicate nature of this recovery.

If construction activity continues to increase, vacancy rates could rise further, jeopardizing any recent progress. For now, the positive absorption numbers signal a step forward for a market striving to stabilize.

Why is Net Absorption Growing?

One factor driving net absorption is stricter return-to-office requirements from employers. While office utilization remains far below pre-pandemic levels—hovering around 50% in many major cities—some companies are taking harder stances to boost in-office attendance.

These policies, ranging from mandates to hybrid schedules, are nudging more employees back into physical offices. Although year-over-year changes in utilization rates are modest, the gradual increase is creating enough momentum to positively impact leasing activity.

Even small gains in office occupancy can lead to measurable improvements in net absorption, particularly as employers lock in long-term leases to support their evolving workplace strategies. This trend signals a cautious but steady path toward recovery in the office market.

Other Macroeconomic currents

Macroeconomic factors are also contributing to the rise in net absorption, buoyed by business-friendly optimism surrounding the administration-elect. Early signals from equity markets point to a climate of increased confidence, which could translate into higher demand for office space.

However, challenges remain. “Conversely, higher medium- and long-term interest rates could place a damper on occupiers’ ability to expand and make capital investments,” NAIOP cautions. While economic optimism is driving demand, the potential for rising interest rates could curb expansion efforts, adding an element of uncertainty to the office market’s recovery trajectory.

For now, the combination of a resilient jobs market and renewed business confidence offers a welcome boost to a sector eager for stabilization.

Takeaways for Tenants

The office market is showing signs of recovery, with positive net absorption signaling a shift after years of decline. For tenants, this means opportunities to capitalize on the changing landscape, but also the need to stay vigilant. The resurgence in tech-driven leasing, stricter return-to-office policies, and macroeconomic optimism are all factors reshaping the market.

What does this mean for tenants?

• Opportunities in select markets: Focus on areas where tech growth and office demand are strongest, such as San Francisco and Silicon Valley.
• Leverage renewed leasing activity: The return of tech companies and AI growth can present negotiation opportunities for tenants willing to act swiftly.
• Monitor supply and demand: Watch for imbalances, especially as construction activity continues to slow, which could impact future vacancy rates.
• Understand economic currents: Macroeconomic factors, such as rising interest rates, may slow expansion plans, so tenants should plan accordingly.

Take control of your lease strategy in this evolving market. Download Surviving the Office Apocalypse to gain deeper insights on how to navigate the shifting office landscape and make informed decisions for your business’s future.