The office market’s struggles are no secret. With vacancies continuing to climb and property values dropping by 5% nationally in 2024, the sector faces significant headwinds. Kermit Baker, Chief Economist at the American Institute of Architects (AIA), doesn’t mince words: “The office market remains the weakest major commercial sector in 2025.” This assessment is underscored by the AIA’s Consensus Construction Forecast Panel, which anticipates a 3.5% decrease in national spending on office buildings this year, with a further 1.3% decline projected for 2026.
The cautious optimism that contractors held at the start of 2025 has given way to uncertainty, thanks to persistently high interest rates and a barrage of policy changes. Ken Simonson, Chief Economist at Associated General Contractors of America (AGC), points to the Trump Administration’s announcement of steep, widespread tariffs as a major factor in developers and owners putting projects on hold. The specter of “mass deportations” of immigrants looms large, threatening the construction industry’s workforce across the board.
Material pricing volatility is adding to contractors’ anxieties. After months of stable or falling prices, the costs of diesel fuel, steel, copper, and other essential materials are on the rise, according to Simonson. This unpredictability is making it increasingly difficult for contractors to plan and execute projects effectively.
The office market’s weaknesses are laid bare in the Yardi Matrix Office National Report for January 2025. The national vacancy rate stood at nearly 20% at the end of 2024, marking a 150-basis-point increase over the previous 12 months. Despite return-to-office mandates from corporate giants like Amazon, economists do not expect vacancies to fall in 2025. Moody’s projects that vacancy rates will peak by the end of the year or in 2026.
Commercial real estate loans in the office sector are also showing significant weaknesses, with delinquency rates reaching historical highs. Brian Strawberry, Chief Economist at FMI, expects these rates to continue climbing. Many building owners had delayed their debt obligations, hoping for a decrease in interest rates. However, the Federal Reserve’s recent policy changes, including a 100-basis-point rate cut since September and plans for further reductions, have raised new concerns about inflation and thrown off the “extend and pretend” strategy.
Financing for office or mixed-use projects is not expected to improve in the next two years, and possibly longer. Even if financing conditions do improve, challenges like high vacancies and the stabilization of capitalization rates and property valuations may persist.
Meanwhile, the data center sector’s growth is reshaping the broader office category. Driven by the demand for cloud computing and artificial intelligence, data center construction spending has nearly doubled since 2020. Data centers now account for more than 25% of office segment spending, up from just 10% a few years ago, according to Strawberry. Traditional office investment, on the other hand, has consistently shrunk, with a 10% decline in 2024 and a further 4% anticipated through 2025. A survey by Private Equity Real Estate (PERE) reported that offices ranked last in terms of real estate investment interest for 2025, with 46% of respondents planning to reduce their investment in this sector and only 8% planning to increase their office holdings.
The office market’s fortunes vary significantly across the U.S. FMI’s first quarter 2025 Census Divisional construction put-in-place (CPiP) forecasts reveal that the West South Central and Mountain states are projected to be the weakest areas this year, with declining investments exceeding 10% each. In contrast, the East North Central and Mid-Atlantic states are expected to expand, with anticipated investment growth of 8% and 4%, respectively, through 2025.
“With a slowdown in investment, we foresee a potential slowdown or decline and reevaluation of economic development across several historically high growth cities, including Nashville, Denver, Raleigh, Atlanta, and Dallas, among many others,” says Strawberry.
Yet, within these challenges lies opportunity. The office market is adap
