2025: A Year of Stabilization After Historic Turbulence
The CRE office market endured another challenging year in 2025, with vacancy rates climbing to a record 20.4% in Q1, marking the highest level on record. Yet beneath these troubling headlines, signs of stabilization emerged that suggest the worst may be behind us.
The market became increasingly bifurcated. While CBRE anticipates a topping out of the national vacancy rate at 19%, prime office space will get scarcer as healthy demand pushes prime-office vacancy to pre-pandemic levels of 8.2% by 2027. This flight to quality has created two distinct markets: trophy properties commanding premium rents and compelling occupancy, while Class B and C assets struggle with obsolescence and negative absorption.
Several encouraging trends materialized throughout 2025. Net absorption of office space turned positive in the second and third quarters of 2024, and sublease inventories declined for three straight quarters, indicating that the massive space glut from pandemic-era downsizing is finally clearing. Meanwhile, 44% of global real estate decision-makers now mandate five days a week in the office — up from 34% two years ago — though actual attendance remains around three days per week.
Geographic performance varied considerably. New York's Midtown has largely returned to pre-pandemic rent levels, and San Francisco's has started to turn around, but is still early in its recovery. Suburban offices demonstrated greater resilience than central business districts, with occupied stock remaining flat to modestly higher, while urban cores continued contracting.
The refinancing wave loomed large over the sector. With $950 billion in maturing CRE debt, combined with tightened lending standards and elevated interest rates, many owners faced difficult decisions about restructuring, repositioning, or exiting underperforming assets. However, lending conditions began easing by mid-year, as just 9% of banks were tightening their lending standards as of June 2025, compared with 30% in April 2024.
2026: Cautious Optimism and Selective Opportunities
Looking ahead to 2026, industry experts project a year of continued adjustment but with improving fundamentals for well-positioned assets. The consensus is neither total recovery nor continued crisis, but rather normalization around altered demand patterns.
The office sector is showing real signs of momentum, with office attendance settling in at higher levels, gross leasing trending higher, and Class A net absorption positive, while sublease inventory is declining, and the office construction pipeline is at its lowest level in a decade. This supply constraint will benefit owners of quality assets, as occupiers looking for new, large-block space face fewer options and higher rental rates in supply-constrained locations.
The demand picture remains complex. The demand backdrop for the CRE office market looks to be approaching 2026 from a position of weakness, with tech employment shedding nearly one-quarter of a million jobs since 2022. AI's impact on white-collar employment adds another layer of uncertainty, with estimates of total white-collar jobs eliminated over the past 18 months ranging from 50,000 to 4,000,000.
Yet, AI also creates new demand sources. AI-focused firms are emerging as meaningful office tenants, seeking collaborative spaces that foster innovation. The Federal Reserve's continued rate cuts — with the Fed Funds Rate expected to reach around 3% by late 2026 — should ease financing pressures and support capital investment and hiring.
Hybrid work is no longer viewed as a disruption but as the baseline operating model, with utilization expected to stabilize at 55 to 65% of pre-2020 norms. Companies continue prioritizing amenity-rich, well-located assets while shedding outdated space. The flexible workspace segment presents opportunities, with the North American flex office market expected to nearly double, from $14.9 billion in 2025 to $28.9 billion by 2030.
Strategic Implications for GPs and Investors
In the CRE office market, quality matters more than ever. Trophy assets in supply-constrained markets will command pricing power, while commodity space faces continued pressure.
Second, adaptive reuse and repositioning strategies warrant serious consideration for appropriately located B and C assets that cannot compete in the modern office market.
Third, geographic selection remains critical. Strong demographic markets with diverse economic bases and limited new supply will outperform. Leasing demand across most product types will be increasingly tied to local concentrations of high-value employment and wage gains, supporting select office submarkets.
Finally, with many assets trading at significant discounts and lending standards normalizing, value-add strategies focused on repositioning and upgrading buildings can generate compelling returns.
The CRE office market of 2026 won't resemble that of 2019, but for investors who understand the new fundamentals, it offers selective yet substantial opportunities. Success will require the foresight to move beyond pre-pandemic norms and embrace the permanent shifts in how, where, and why people work. Covercy's platform helps GPs track portfolio performance and performance reporting across office and other asset classes, while asset class insights support strategic allocation decisions.