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.