The office sector is poised for continued momentum this year as economic growth and increasing office attendance will continue to drive robust leasing, according to Savills Research & Data Services’ Q4 State of the US Office Market.
In-office mandates are on the rise along with required in-person days as employers prioritize collaboration, innovation and team cohesion, the report said. This has driven strong leasing activity, particularly for high-quality space. Office leasing volume reached a post-pandemic high during the fourth quarter at 56.7 million square feet leased, and this momentum is expected to continue in 2025 as return-to-office continues to gain traction despite economic uncertainty, said Savills.
Office-using employment growth was negative to start 2025, although it remains higher than pre-pandemic levels, the report said. Recent declines in availability across central business districts and suburban markets are a positive sign. Although it remains elevated, availability ended the year on a downward trend at 24.8%, which marked the first significant decrease since the pandemic, Savills said.
Inventory fell slightly during the fourth quarter to 3.69 billion square feet and available sublease space also dropped to 152.9 million square feet from 173.7 million square feet the year prior.
Savills said markets will remain bifurcated, with stronger demand for well-located, Trophy Class A spaces offsetting weaker demand for lower-quality, dated and less expensive spaces. As higher-priced space is leased, average asking rents have been stabilizing. Asking rents averaged $42.61 per square foot during the fourth quarter, down slightly from the previous quarter. However, Class A asking rents rose to $46.33 per square foot from $45.45 the previous year.
Some Sun Belt and Texas markets are still experiencing office inventory growth, but most other regions are beginning to shrink their inventory in response to high availability, said Savills. Nashville, San Diego, Boston and Austin have the largest amount of office square footage currently under construction as a percentage of existing inventory.
Total investment sales activity of $63.3 billion in 2024 was up 20% from $53.1 billion in 2023 but remained down 46% from $117.2 billion in 2022 before interest rates started to go up. Savills said distressed properties will moderately trade going forward as a floor on valuations is being set.
Despite higher inflation and a potential interest rate pause in 2025, Savills said it expects office-using employment to grow, in-office rates to rise and demand for high-quality space to support sustainable leasing. The firm pointed to several positive economic indicators including strong consumer and government spending, low unemployment, and increasing consumer confidence.
