Projections Show Office Vacancy Rates Yet to Reach Peak, Downsizing Takes Hold of New Lease Deals

Though the expansion of vacancy rates in some of America’s major office markets has begun to slow, more downside may still lie ahead for property managers. Forecasters like NAIOP see negative net absorption (more square footage becoming vacant than being leased) continuing across the US for another year while Moody’s now projects a peak in availability of office properties to arrive in 2026. 

In-office attendance has been stuck near 50% of total capacity for a year and a half. While the majority of workplaces now have policies that require workers to spend at least as much time in the office as they do working remotely, many companies are maintaining office spaces that are larger than necessary. Insights from JPMorgan show that downsizing has gained traction among companies agreeing to new leases.

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In the first quarter, 57 office markets tracked by CBRE experienced negative net absorption, meaning more space was vacated than leased. That pushed the total office vacancy rate to a fresh 30-year high of 19%. As the latest quarterly leasing data for major cities across the US becomes available, it is clear that vacancy has remained elevated across many markets throughout the Q2, and some are continually registering record highs. In the tech hub of San Francisco, the vacancy rate grew to a record 37%, up from 36.4% in the prior quarter. Though the growth of AI companies has helped to blunt the cratering of demand for office space in the city, more square footage is still being vacated than leased. The latest quarter’s figures are equivalent to a net decline (or absorption) of about -442,000 sq ft, according to CBRE data. Though there is less of a drought in Washington DC, which has seen vacancy soar to 22.4%, this figure represents a record high. DC’s market, populated largely by agencies of the federal government, experienced a higher rate of negative net absorption at -537,000 sq ft in Q2.

It is not so bad in all commercial real estate markets, however. The nearby city of Baltimore broke a streak of five consecutive quarters of negative absorption, leasing about 39,400 sq ft more than what was vacated in the city. Its overall vacancy rate remained unchanged at a record high of 19.2%. In Manhattan, the heart of New York City’s massive financial industry, Avison Young reports that the overall office availability rate fell slightly to 19.6% in Q2 from 19.7% in the quarter prior. The city has struggled for years to get office leasing back on its feet as…