The U.S. office market continued a slow recovery in May, with the national vacancy rate falling to 17.6%, down 180 basis points from a year earlier and more than 230 basis points below its March 2025 peak. However, the improvement comes amid a widening divide between high-performing buildings and aging properties struggling to remain competitive, according to Commercial Cafe.
National office listing rates averaged $33.61 per square foot in May, down 1.4% year-over-year, while the construction pipeline remained historically limited at 28.73 million square feet, representing roughly 0.4% of total inventory.
Distressed CBD Buildings Face Growing Pressure
The most severe valuation declines continue to hit central business districts, where older properties face weaker demand as companies prioritize newer, higher-quality spaces.
Since 2024, distressed transactions have accounted for 19.4% of office space traded nationally, up from 6.2% between 2021 and 2023. In CBDs, that figure rises to 34.6%, highlighting the concentration of distress in downtown office markets.
The decline has been particularly steep among large properties. The average size of distressed sales has doubled to roughly 200,000 square feet since 2024, and 73% of CBD buildings with comparable historical sales have traded below previous prices.
Seattle illustrates this pressure: the 44-story U.S. Bank Center is expected to sell for approximately $280 million, roughly 54% less than its 2019 sale price.
Major Markets See Different Paths to Recovery
While some office markets remain challenged, others are showing signs of stabilization.
San Francisco recorded one of the largest improvements in vacancy, dropping 520 basis points year-over-year to 23.3% after reaching a peak of 29.3% in early 2025. The improvement aligns with stabilization in local office employment, particularly as AI-related growth supports technology, finance, and professional services sectors.
Manhattan maintained one of the nation’s strongest office markets, with a vacancy rate of 13.1% and nearly $3.7 billion in office sales through May — the highest total among U.S. markets. New York also led major metros in office employment growth, alongside Austin, with a 1.4% year-over-year increase.
Miami remained among the tightest office markets, posting some of the lowest vacancy levels nationally, while also leading Southern markets in asking rents at $58.41 per square foot.
Construction Pulls Back as Supply Adjusts
Office development remains subdued across the country, a trend expected to help ease inventory pressures over time.
Boston, Manhattan, and Dallas led the national construction pipeline and were the only markets with more than 2 million square feet under development. Boston alone had nearly 3.9 million square feet underway, while Manhattan had 3.1 million square feet.
Austin’s office pipeline has fallen by more than half over the past year to 1.2 million square feet. Even with a 440-basis-point decline in vacancies, the market continues to post the highest office vacancy rate among major U.S. metros at approximately 24%.
A Market Defined by Flight to Quality
The decline in vacancy does not necessarily signal a full return to the office. Workplace attendance has remained around 55% for several years, reflecting the staying power of hybrid work.
Instead, the market is increasingly separating into winners and losers. High-quality, adaptable buildings continue to attract tenants and investment, while older assets face mounting valuation pressure.
With limited new supply entering the market, owners are increasingly focused on improving flexibility, upgrading properties, and repositioning outdated buildings to compete for tenants in a more selective office market.
