The Great Office Market Divide
As we reach the midpoint of 2025, the U.S. office market is undergoing a transformation that’s reshaping investment strategies, tenant expectations, and urban development. The term on every commercial real estate professional’s lips? Bifurcation.
This growing divide between high-performing, amenity-rich office buildings and their potentially outdated, underutilized counterparts is no longer a trend—it’s the new normal.
At the heart of this bifurcation lies a stark contrast in demand. Class A and trophy office buildings—those with top-tier amenities, sustainability certifications, and prime locations—are seeing strong leasing activity and rising rents. These buildings are typically located in central business districts or vibrant mixed-use neighborhoods, offering tenants access to transit, dining, and wellness features that align with post-pandemic workforce expectations.
In contrast, Class B and C buildings face a crisis of relevance. With hybrid work entrenched and many companies downsizing their footprints, these older buildings—often lacking modern HVAC systems, flexible layouts, or ESG credentials—are experiencing elevated vacancy rates and declining valuations. In some markets, they’re being repositioned for alternative uses like residential conversions or creative flex space, but many remain in limbo.
The push for employees to return to the office has added fuel to this divergence. Companies mandating in-office attendance are prioritizing quality over quantity, opting for smaller but more engaging spaces. This has created a “flight to quality,” where tenants are willing to pay a premium for buildings that support collaboration, wellness, and sustainability.
Recent industry data shows occupancy rates in Class A buildings outpacing those in Class B/C by as much as 20% in major metros like New York, Boston, and San Francisco. This trend is expected to continue as employers seek to attract talent with environments that reflect their brand and values.
For investors, the bifurcation presents both risk and opportunity. Capital is flowing toward high-performing assets, particularly those with LEED or WELL certifications, smart building technologies, and flexible floor plans. Meanwhile, lenders are tightening underwriting standards for older assets, leaving some owners facing financial distress and forced sales.
Adaptive reuse is emerging as a creative solution, especially in cities with housing shortages. However, as previously discussed here, the economics of converting office to residential remain challenging due to zoning, floorplate design, and construction costs.
The bifurcation of the office market will likely deepen in the coming years. As technology, tenant expectations, and ESG mandates continue evolving, the gap between “future-ready” and “functionally obsolete” buildings will widen. For CRE professionals, the key will be to identify which assets can be repositioned—and which should be exited.
In this new landscape, success will hinge on agility, innovation, and a clear-eyed view of what the modern workplace truly demands.
Carey S. Blakley, CFA