Lack of New Supply, Spiking Demand Drive U.S. Office Market Recovery

A new era of office utilization is upon us, and it’s not applied equally to all U.S. cities, especially as work from home has finally abated five years after the COVID-19 pandemic.

A report published Tuesday by Yardi Matrix found significant divergences in office utilization across the top 25 metropolitan areas during the last 12 months, particularly as work-from-home levels have declined nationally for four consecutive years. Austin, Texas, reported an office occupancy rate of 74.6 percent, as office-using employment levels have grown nearly 30 percent in the state capital since 2020. 

New York City also reported strong office utilization metrics, as only 11.8 percent of office employees have worked from home since the fall of 2024, while the Big Apple’s overall office occupancy hovered just under 60 percent, well above the 41.8 percent office occupancy rates reported by Philadelphia. 

The divergent supply booms in these respective cities have created different vacancy narratives. According to Yardi Matrix, Austin added 15.6 million square feet of office space in the last five years — roughly 16 percent of existing stock — driving the city’s 2025 vacancy rate to 27 percent. 

New York, on the other hand, barely added any new buildings relative to its existing stock. 

“Manhattan, which had much less growth in office employment than Austin, was able to push its vacancy rate down by adding only 16.6 million square feet of space (3.6 percent of stock),” wrote Yardi Matrix researchers. “Flexibility will be key to finding a place in an oversaturated market, and we expect an increase in creative solutions such as coworking and conversions to help fill the gap in demand.”

Nor were vacancy rates equal across major American cities. While the national office vacancy rate has declined 90 basis points in the last 12 months to 18.6 percent, cities such as San Diego, Washington, D.C., Detroit and Seattle have been hit hard by increasing vacancies that outstrip the national average. 

Detroit’s vacancy rate increased by 160 basis points in the last 12 months and sits at 24.1 percent, while San Diego’s increased by 150 basis points and sits at 22.1 percent. Seattle’s, meanwhile, rose by 160 basis points and resides at 27.4 percent; and the office vacancy rate in Washington, D.C., increased by a stunning 250 basis points and now sits at 20.2 percent. 

But other cities such as New York, San Francisco and Houston have seen a “comeback kid” narrative play out with their office stock. Manhattan’s office vacancy rate declined 370 basis points in the last 12 months and sits at a national low of 13 percent; San Francisco’s vacancy rate dropped 350 basis points to 23 percent; and Houston’s dropped 420 basis points to 20.2 percent. 

A big reason vacancies are dropping in some cities is due to an increased demand for office space and a rise in the number of office-using jobs in 2025. 

Yardi Matrix cited data from the Bureau of Labor Statistics that found that office-using sectors gained a total of 197,000 jobs in the last year to report a 0.6 percent increase. According to that same data, nine of the top 25 U.S. labor markets have seen the percentage of jobs within office-using sectors increase over the past five years, as well. 

This rebound in utilization across major cities has helped spur investment sales. 

Yardi Matrix found that the office market recorded $42.6 billion in investment sales through the end of October 2025, a sharp increase from the $29.2 billion the sector recorded during the same time period in 2024. 

Even so, as vacancies drop in some major cities, and increase in others, the occupancy rate and investment sales activity are both expected to rise nationally due to the pronounced lack of new supply. 

There is only 33.4 million square feet of new office space currently under construction across the U.S. (equal to 0.5 percent of existing stock), with only 12.9 million started in the last 10 months, essentially equal to last year’s total starts, according to Yardi Matrix. 

“As the office sector undergoes a prolonged realignment, development has slowed drastically,” wrote the Yardi Matrix researchers. “While there are some signs that the pipeline is beginning to thaw, we anticipate it will be years before there is any significant increase in new office construction.”

Brian Pascus can be reached at bpascus@commercialobserver.com.