Larger properties hit hardest as empty space rise and lease expirations pile up
The long-anticipated wave of distress in the US office market is beginning to take hold in early 2025, with large urban properties now facing growing pressure from persistently low demand, rising vacancies, and a surge in lease expirations.
Office utilization remains stagnant, with average attendance plateauing at just 54%, as measured by Kastle’s Back to Work Barometer. These trends reflect the now-entrenched shift to hybrid and remote work models.
The national office vacancy rate climbed 170 basis points year-over-year, reaching 19.9% at the end of March, according to new data from c.
“We anticipate the trend of individual office building conclusions being finalized to grow in 2025. With this, we expect distress numbers to tick upwards – along with an increase in repositioning and/or conversions occurring,” CommercialEdge director Peter Kolaczynski said in a report.
In 2024, 25 million square feet of office transactions were classified as distressed, a 39% increase from the previous three-year average of 18 million square feet. While overall office transaction volume held steady below 2,400 deals, the share of those in distress climbed to 10.8%.
Notably, the average size of distressed assets jumped by 30%, reaching over 200,000 square feet, suggesting that larger buildings are increasingly at risk. Urban core markets are showing particular strain: CBD transactions in distress tripled in 2024, while urban-area transactions nearly doubled. Suburban properties, though stable in transaction volume, still made up half of all distressed office deals last year.
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Chicago recorded the highest number of distressed office transactions in 2024, registering 26 deals, a slight uptick from 24 in 2023. However, the average property size nearly doubled year-over-year, indicating greater losses per asset.
Despite a gloomy near-term forecast, the report expect some relief as the pipeline of new office developments contracts. Office construction starts have been sharply reduced: falling from 50 million square feet in 2022 to 25 million in 2023, and again to just 12 million in 2024.
“While the office market outlook seems gloomy in the near term, opportunities to adjust will present themselves as the uncertainty surrounding the sector lifts and things begin to move,” CommercialEdge noted. “Pressure will ease off owners as less supply comes online over the next few years.”
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