Is the U.S. Office Market Finally Turning a Corner? Q3 Data Signals a Potential Inflection Point
The U.S. office market may be nearing an inflection point. New CoStar data shows positive absorption, stabilizing vacancy, and rising transaction volume—here’s what it means for investors and occupiers.
Introduction: Why the Office Market Still Matters
Few commercial real estate sectors have faced as much scrutiny over the past few years as office. Between the long-term effects of COVID, elevated interest rates, stalled lending, and historically high vacancy, many investors have questioned whether the office sector can recover at all.
Yet recent data suggests something important may be changing.
In a recent episode of America’s Commercial Real Estate Show, host Michael Bull sat down with Phil Mobley, National Director of Office Analytics at CoStar Group, to break down what’s really happening in the U.S. office market—and where it may be headed next.
Q3 Office Market Data: Early Signs of an Inflection Point
According to CoStar’s preliminary third-quarter data, the U.S. office market posted approximately 10 million square feet of positive net absorption nationwide.
That’s a milestone the market hasn’t reached since early 2019.
While one quarter does not define a trend, this shift stands out because:
It marks the first meaningful positive absorption in years
It coincides with stabilizing vacancy rates
It reflects improving performance beyond just trophy assets
National office vacancy currently sits around 14%, the highest level on record and well above the 12.6% peak during the Great Recession. However, vacancy appears to have plateaued, suggesting the market may be at or near its cyclical peak.
Class A-Minus and B Office Space Is Backfilling
One of the most notable developments in Q3 was renewed demand for what CoStar classifies as three- and four-star office buildings—often described as Class A-minus and Class B-plus assets.
These properties had struggled post-pandemic, caught between:
Premium trophy office buildings with top-tier amenities
Lower-cost non-institutional office stock
Now, with very limited new office construction in the pipeline, tenants are reassessing what qualifies as “good” space. As a result, mid-tier office buildings are beginning to regain occupancy for the first time since 2020.
Office Construction at Generational Lows
New supply—or rather, the lack of it—is playing a critical role in this stabilization.
Key construction trends include:
Record-low office starts over the past 18 months
Roughly 20 million square feet of starts in a full year, which would have been a single strong quarter pre-pandemic
Fewer new trophy buildings delivering in coming years
This constrained supply environment is helping existing buildings compete more effectively and reshaping tenant expectations across markets.
Demand Is Highly Market-Specific
Office performance continues to vary significantly by geography.
Markets Showing Strength
New York City: Positive absorption for six consecutive quarters, strong return-to-office metrics, and rising transit ridership
Dallas: Continued growth and consistent office demand
Markets Still Facing Headwinds
Los Angeles: Slower economic growth tied to entertainment and media
Chicago: Slowing hiring and modest economic expansion
Washington, D.C.: Federal uncertainty and reduced government-driven demand
These differences largely reflect local economic drivers, hiring trends, and return-to-office behavior rather than a uniform national decline.
Industries Driving Office Demand
Two sectors are standing out as major demand drivers:
1. Financial Services
Strong hiring and office utilization in financial services has supported office markets in:
New York
Dallas
Charlotte
Tampa
2. Medical and Ambulatory Healthcare
Medical office continues to outperform broader office trends, supported by:
Aging demographics
Expanding outpatient services
Strong employment growth
States such as Florida, Texas, Arizona, and Illinois are seeing particularly strong medical office demand.
Office Utilization and Space Per Worker Are Normalizing
Before the pandemic:
Office space per worker had declined to ~230 square feet
Office utilization was already trending lower
Post-pandemic disruption pushed that figure closer to 250 square feet, driven by hybrid work and underutilized space.
Today:
Space per active office worker has declined to ~240 square feet
CoStar expects it to gradually return toward 230 square feet over the next five years
This suggests the market is slowly re-establishing pre-COVID efficiency trends—just at new equilibrium levels.
Transaction Volume Is Rebounding
Perhaps most encouraging for investors: office transaction volume is coming back.
Preliminary Q3 data shows:
Year-over-year transaction volume up nearly 100%
Activity levels approaching pre-pandemic norms
A narrowing bid-ask spread between buyers and sellers
Institutional investors—largely sidelined over the past two years—are returning to the market, while financing remains available, albeit expensive.
What This Means for Office Investors
With replacement costs far exceeding current acquisition prices, many buyers are focusing on:
Low-basis acquisitions
Assets priced well below replacement cost
Strategic decisions between value-add upgrades or cash-flow-focused operations
At the same time, some occupiers remain selective, choosing to forego expansion rather than compromise on space quality—creating both opportunity and risk depending on asset positioning.
Outlook: Cautious Optimism for the Office Sector
The U.S. office market is not “fixed,” but the data suggests it may be turning a corner.
Key takeaways:
Vacancy may be peaking
Mid-tier office assets are regaining relevance
New supply will remain constrained for years
Transaction volume is recovering
Market performance will remain highly localized
For investors, lenders, and occupiers alike, the next phase of the office cycle will reward discipline, local market knowledge, and realistic underwriting—not blanket assumptions about the sector’s future.