Location has become more important than ever when it comes to office space leasing: Occupiers are making location and space decisions with “more confidence than they’ve had in years” due to the normalization of hybrid work, Jessica Morin, director of office research in the U.S. for CBRE, said during a webinar on the company’s 2025 real estate market outlook on Jan. 15.
The office “up-cycle” that began last year will gain traction in 2025, Morin said. The company expects a shortage of prime space emerging toward year-end and “a steady office revival in America’s downtowns,” according to its 2025 real estate market outlook report. The outlook is in agreement with those from Avison Young and Colliers, which also expect 2025 commercial leasing velocity, tenant prospects and investor interest to see upward momentum. Indicators like asking rents, taking rents, concession packages, investment pricing and capitalization rates are expected to remain flat, according to the Avison Young outlook.
Despite return-to-office pushes by large tech and finance firms, hybrid work is here to stay, Morin says. It has reached a steady state, with employees coming into the office two to three days per week on peak attendance days, when office utilization looks similar to pre-pandemic levels. While renewals are going to “remain strong in office leasing, we also believe that there's going to be this shift towards portfolio stability and even expansion,” Morin said.
The organizations that choose to move or expand will show a strong preference for quality office buildings located in central, amenity-rich locations, “and downtowns are ideal for that,” Morin said. While quality buildings in vibrant mixed-use locations will continue to outperform in 2025, “a glut of [other] commodity office space and office-centric locations are going to continue to really struggle to retain and also attract and compete for tenants from a much smaller pool.”
In “vibrant, mixed-used locations” — Morin named Midtown Manhattan; uptown Charlotte, North Carolina; and the Fulton Market district in Chicago as examples — landlords have leverage due to low vacancy rates and supply constraints, and they “are actually able to roll back on some of these record high concessions,” she said during the webinar. She contrasted their position with that of “commodity” office buildings and office-centric locations, where “the tenant really holds all the leverage in negotiations,” she said.
“While concessions are at an all-time high, either landlords are going to have to continue to increase concessions, or if they can't afford that upfront cost, they're going to have to lower asking rent,” Morin said. “While tenants can find some attractive deals here, they also really need to be cautious [and] understand the landlord's financial health and position and its ability to meet its debt obligation,” she said. “Otherwise, if the landlord is not able to maintain the office property, or is … at risk of losing it, that's going to create a whole other slew of issues for office tenants.”