20.4% Vacancy and Counting: Is Office CRE Finally at the Bottom?

TL;DR

Q1 2025 national office vacancy hit a record 20.4% per Moody's — the highest reading in the modern era. DOGE broke hundreds of federal office leases, hammering the DC metro area hardest. But here's what's getting lost in the doom headlines: by late 2025, office values stabilized, NYC Midtown returned to pre-pandemic rent levels, and office construction collapsed to 82% below Q1 2020 levels. The supply correction the market needed is happening violently and quickly. The office sector likely troughed in Q2 2025, and the contrarian opportunity is becoming harder to ignore.

The 20.4% Headline in Context

Let me be direct: 20.4% national office vacancy is ugly. There's no way to sugarcoat it, and I won't try. Moody's Q1 2025 data confirmed what everyone in the industry already felt — the office market absorbed more pain than any other commercial real estate sector during this cycle.

But context matters enormously. That 20.4% is a national average that includes everything from trophy towers in Manhattan to commodity suburban office parks in tertiary markets. The dispersion within office is wider than in any other asset class, and understanding that spread is the difference between a good investment and a terrible one.

At F6 Partners, we've been telling our investors for over a year that the office market is not one market — it's dozens of micro-markets with fundamentally different trajectories. The Q1 data validates that thesis completely.

DOGE and the DC Disaster

The federal government's Department of Government Efficiency broke hundreds of office leases across the country, a disruption we analyzed in depth in our piece on DOGE and the federal lease exodus reshaping office CRE, with the DC metro area absorbing the greatest impact. Federal agencies historically anchored millions of square feet of Class A and B office space in Northern Virginia, Maryland, and downtown DC. When DOGE executed its consolidation mandate, those leases evaporated almost overnight.

The ripple effects have been severe. Sublease availability in the DC area spiked, direct vacancy pushed past 25% in some submarkets, and landlords who relied heavily on government tenancy found themselves holding assets with dramatically impaired cash flows. For DC-focused office investors, this was a generational disruption.

But here's the counterpoint that deserves equal attention: the DOGE lease breaks accelerated a correction that was already underway. The federal government was going to reduce its office footprint regardless — remote work policies and space utilization data made that inevitable. DOGE compressed a five-year transition into twelve months.

The Stabilization Nobody Expected

By late 2025, something quietly remarkable happened: office values stabilized. Not recovered — stabilized. After years of relentless declines, the pricing correction found a floor. Buyers and sellers began agreeing on value, and transaction activity picked up.

NYC Midtown was the standout story. Asking rents for top-tier Midtown office space returned to pre-pandemic levels, driven by financial services firms competing for talent with premium workplace experiences. Goldman Sachs, JPMorgan, and other major employers doubled down on their return-to-office mandates, and the flight to quality that's been reshaping the office market concentrated demand in the best buildings.

Office construction collapsed to 82% below Q1 2020 levels — a staggering supply correction. With virtually no new competitive supply entering the market, existing high-quality assets face dramatically less competition for tenants. This is the supply-side discipline that eventually creates value for patient investors.

Is the Bottom In?

I believe the office sector troughed in Q2 2025. That's a conviction call, and I want to explain my reasoning. The combination of record-low construction, stabilizing values, improving leasing velocity in top markets, and the natural absorption of pandemic-era sublease space all point to Q2 as the inflection.

That doesn't mean every office building is a buy. Far from it. The bifurcation between Class A trophy assets and commodity space is permanent. Class C and much of Class B office will continue to lose value and ultimately convert to other uses — as we've detailed in our coverage of adaptive reuse and office conversions hitting record levels — which creates its own set of opportunities.

At F6 Partners, our core focus remains student and senior housing, but we recognize that the office trough is creating selective opportunities for adaptive reuse and repositioning plays that align with our broader investment philosophy. For private equity firms evaluating what PE in real estate actually looks like, distressed office presents a contrarian entry point. The 20.4% vacancy headline is real, but so is the recovery that's beginning to take shape beneath it.