The office isn’t dead, but it’s definitely changed.
Many employees come in a few days a week. Meetings happen on-site and over Zoom, and offsites replace water cooler chat.
As companies rethink how and where work gets done, the real estate industry grapples with a long-term shift. Hybrid work and ESG priorities, like energy efficiency and decarbonization, are reshaping tenant expectations and the future of office space. Here’s what we know now and what’s coming next.
Understanding hybrid office models
Hybrid work challenges traditional ideas of in-office productivity.
What is a hybrid office model?
Hybrid work is a mix of remote and in-person work. It allows employees to better split their time between home and the office. Fifty-two percent of full-time, eligible employees currently work in a hybrid environment.
Recently, some companies have pushed workers to return to the office full time. However, this has not reversed the course of hybrid work. Only 12% of executives with hybrid and/or remote workers plan to announce an RTO mandate next year.
Hybrid has become the baseline expectation for many professionals. Tenants enjoy reduced overhead while employees achieve better work-life balance. That mutual benefit is hard to unwind.
How hybrid work is shaping CRE in 2025
Right after the pandemic, hybrid work seemed like a temporary fix: a way to protect employee health without losing productivity. But as we inch further away from that milestone, it’s become clear that hybrid work is here to stay.
The effects are everywhere. Reduced square footage slashes operating expenses. Leases are shorter and more flexible, with shared amenities, and adaptable floor plans that can serve multiple tenants over time. These trends also support ESG goals, since they encourage buildings to adapt instead of being replaced.
Tenants are also more selective. They want Class A spaces that support collaboration but don’t sit empty the rest of the week. This is especially true for healthcare, life sciences, and R&D groups, which continue to lease space with greater emphasis on customization and ESG performance.
Key trends defining the office market in 2025
Offices still matter, but the way we use them has changed.
Office demand is stabilizing, not recovering
Employees are no longer interested in the pre-pandemic status quo. Sixty percent of remote-capable employees prefer a hybrid setup, compared to one-third who want fully remote work and fewer than 10% who prefer being fully on-site.
While return-to-office (RTO) mandates tend to dominate the headlines, they haven’t driven meaningful spikes in leasing activity. Hybrid is the clear frontrunner in the remote versus in-office debate.
Utilization rates remain well below pre-COVID levels
Office utilization is still much lower than it was pre-pandemic. In major U.S. markets, rates hover between 50 and 65%. That’s a stark contrast to the near-full occupancy of 2019, and a clear signal that the footprint needed per employee has changed.
Emerging drivers of hybrid space demand
Even as overall office demand slows, specific sectors continue to fuel activity.
AI and tech companies are still leasing—selectively
While overall demand has cooled, AI and digital infrastructure firms are creating new hot spots. In markets like New York City, San Francisco, and Austin, tenants seek high-spec, modern spaces that reflect their culture and support hybrid collaboration.
Life sciences, healthcare, and R&D remain active
Unlike traditional offices, lab and research spaces can’t be remote. These industries continue to drive leasing in specialized facilities. What’s changed is a sharper focus on customization and sustainability.
Flight to quality is reshaping leasing decisions
As tenants prioritize flexibility and ESG performance, the gap between top and lower-tier office space widens.
Class A space still attracts tenants
Top-tier buildings with modern amenities, strong ESG profiles, flexible design, and premium location continue to perform well. Additionally, these spaces often carry LEED or WELL certifications, reinforcing their appeal to tenants with sustainability mandates.
Class B and C assets continue to lag
Lower-tier buildings struggle to keep pace, especially those that aren’t updated. As of Q4 2024, U.S. office distress totaled $51.6 billion (with another $74.7 billion at risk), primarily driven by Class B and C assets. Many of these buildings face long-term vacancy unless they are repositioned.
Lease models are evolving to match new expectations
Tenants expect flexible terms and usage-based pricing in their leases.
Flexibility is the new default
Modern tenants want shorter leases and adaptable floor plans. For example, one tenant’s studio can become another’s lab or kitchen, keeping the space useful across leasing cycles. Rigid office leases are becoming the exception, not the rule.
Dynamic pricing is gaining interest
Some landlords are experimenting with dynamic or occupancy-based pricing, which ties rent prices to actual usage. When teams come in less, tenants pay less. This model offers tenants more flexibility and helps owners align revenue with how the space is actually used.
Public sector downsizing is reshaping market dynamics
Government reductions have paved the way for repurposed agency buildings.
Federal and state agencies are shrinking their space
In D.C., Sacramento, and other capital cities, state and federal agencies are cutting back on real estate. A smaller public-sector footprint has created a wave of vacancies in buildings that were once considered sure bets.
Vacated assets are being repurposed
Many former government buildings are finding new life as residential units or science labs. Adaptability has become essential for maintaining long-term profitability.
Urban responses to a hybrid-first market
Cities are testing new strategies to make better use of underused office space.
Office-to-residential conversions are underway, but uneven
Cities like Boston, Los Angeles, and Chicago are rolling out incentive programs to turn underused office towers into housing. But implementation is uneven due to obstacles like increased costs, zoning restrictions, and project timelines.
Retrofitting is outpacing new construction
With high interest rates and construction costs, many developers are choosing to reposition existing buildings. Retrofitting is faster, cheaper—averaging 30% less than new construction, even with land costs—and often better aligned with decarbonization goals.
What this means for CRE investors and developers
As the rules change, strategy becomes the edge.
The market is fragmenting by location and use
Commercial real estate has always been nuanced, but a fragmented market has made this even more so. Performance varies dramatically based on location, asset quality, and tenant type. It’s more important than ever to prioritize local trends over national averages.
Opportunity lies in flexibility, quality, and reuse
Investors and operators who prioritize adaptive space, ESG performance, and tenant experience will be best positioned to navigate this shift. The hybrid era rewards those who can think creatively and move quickly.
Hybrid is the norm, not the exception
The five-day office week is a thing of the past. Hybrid work marks a structural change in how we work and live, and real estate is catching up. Now is the time for CRE leaders to adapt, invest wisely, and shape what’s next, keeping flexibility and sustainability at the forefront.
