NAI Hiffman's Adam Johnson: Office Is Recovering, Adjusting To New Reality

Why It Matters

The shift toward smaller, flexible office spaces reshapes investment risk and pricing, making traditional large‑anchor models less reliable for owners and capital providers.

Key Takeaways

• Office sales rose 35% nationwide in 2025.
• Large office vacancy ~30%; sub‑20k SF vacancy ~10%.
• Construction costs up 40% but rents lag behind.
• Small offices attract local tenants, offering higher stability.
• Investors should prioritize flexible, easily re‑leasable spaces.

Pulse Analysis

The commercial office market is emerging from a pandemic‑induced slump, with 2025 sales up 35% and leasing activity climbing more than 5% year‑over‑year. High‑profile Chicago deals—such as the $55 million sale of 190 South LaSalle—signal capital returning to the sector, but they mask a broader reality: vacancy rates remain elevated, especially in large, institutional properties. Nationally, vacancy sits near 18.4%, while Chicago’s buildings over 100,000 SF hover around 30% vacancy, indicating that headline transactions are the exception rather than the rule.

A deeper dive reveals a structural pivot toward smaller office footprints. Spaces under 20,000 SF now average just 10% vacancy, compared with 23% for 50‑100 K SF and 30% for 100 K SF plus. Tenants in these compact buildings tend to be local firms or owner‑users, offering greater lease stability and lower tenant‑improvement costs. Meanwhile, construction and operating expenses have surged roughly 40% since 2020, outpacing rent growth that remains in single‑digit territory. This cost‑rent gap forces landlords to either absorb higher expenses or pass them on, a dilemma that intensifies for large‑scale assets dependent on anchor tenants.

For investors, the data suggests a recalibrated valuation framework. Smaller, flexible offices deliver higher price‑per‑square‑foot multiples because owner‑users value control alongside income. Strategies that emphasize easy entry and exit—such as spec suites—and align pricing with local comparables are becoming essential. As the office sector continues its reset, capital will likely gravitate toward assets that combine lower vacancy risk with adaptable lease structures, reshaping portfolio allocations across major markets.