An acceleration in office leasing activity is coinciding with a slowdown in deliveries, which is creating a spillover demand in which broader segments of the market are beginning to stabilize and grow, according to JLL’s recent office market dynamics report.
Newer building supply peaked in 2022 with more than 100 million square feet across the country but has declined 25% since then. The buildings that are most competitive with newer supply have benefited from increased demand, including buildings that have been renovated in the past decade and historical buildings with unique features or architectural significance, said the report. Highly amenitized buildings in central business district markets gained nearly two million square feet of occupancy in 2024 regardless of their age. Availability in mixed-use neighborhoods and transit-oriented notes also has been on the decline.
The trend is expected to persist as office development continues to slow, with just over 500,000 square feet of construction breaking ground in Q4. Most new projects are small-scale, pre-committed developments, said JLL. Nearly 30 million square feet delivered in 2024, and that figure is expected to drop by 20% in 2025 and by almost 75% in 2026 and 2027.
“In the absence of an imminent acceleration in groundbreakings, new office deliveries will be extremely low by historical standards from 2026 through at least 2028,” said JLL. “Compounding the impact of slowing development activity, conversions and redevelopments have been growing over a 20% annual growth rate since 2020 and have established record inventory removal levels for each of the past four years.”
In 2024 more than 37 million square feet were taken offline or planned for removal, mostly for office-to-residential conversions. Such projects are being driven by incentives for office redevelopments and deeply discounted office valuations. JLL said office inventory removals will continue this year, although the runway for additional growth is retreating. As a result, upgrading assets to retain offices may become a more dominant strategy over the next two years.
Overall office investment volume increased by roughly 30% year over year in 2024, largely driven by portfolio sales or office alternatives including life science, medical office and data center. Single-asset traditional office sales increased by only 10% year-over-year, matching 2010 levels of liquidity, said JLL. While sales remain relatively slow, there are signs owners are investing in their portfolios, including spending money on building improvements.
Office CMBS delinquency rates rose more than 250 bps since Q3, the sharpest increase in recent years as asset valuations remain under extreme pressure, said JLL. Distress-driven transactions were more frequent in 2024 and appear to be poised to grow in 2025.
The fourth quarter was the culmination of a strong year of progress in stabilizing the U.S. office market, but pressures remain, said JLL.
“Leasing activity may experience some choppiness in the first half of the year amid a volatile policy outlook, but tenant requirement volume continues to trend upwards and larger users are becoming more active,” the report said. “While the growth rate will slow in 2025, leasing volume is expected to grow by nearly 10% YoY.”
JLL said leasing strategies are likely to continue to skew toward renewals as newer availability disappears.