2025 Office Market Outlook

By: Nate Stevens, Managing Partner, Designated Broker

The Greater Portland office market began 2025 with an increase in vacancy rates compared to the previous year. Direct vacancy rates across the entire market rose from 7% to 8.15%, which is the highest since 2013. Over the past several years, it became evident that the effects of the pandemic would persist longer than initially expected. This is due to pre-2020 leases of seven to ten years expiring and companies continuing to adjust their real estate needs as they rolled. While this trend was anticipated, a few unexpected movements in the marketplace drove the vacancy rate higher than anticipated. Direct vacancy rates had been trending downward over the last three to four years, however sublease vacancy rates were simultaneously increasing at a rapid pace, offsetting any positive trends in direct vacancies.

On an encouraging note, the 2024 office market saw a decline in sublease vacancy rates for the first time since the pandemic. The initial post-pandemic surge in sublease space was driven by companies shedding space mid-lease, so this reversal signals a positive shift for the local market’s future. However, despite the drop in sublease space, the total vacancy rate increased, representing no positive net absorption in the overall office market.

As in previous years, different submarkets experienced varying outcomes, with larger vacancies in certain areas sustaining higher overall rates. The strongest submarket over the past year was downtown Portland, where both Class A and Class B properties experienced positive absorption and decreases in both direct and sublease vacancy rates. Notably, the reduction in Class B rates was entirely due to leasing activity and absorption, rather than conversions of office buildings to alternative uses such as residential or hospitality. This demonstrates a growing demand for office space in this submarket throughout 2024 and limited significant new office availabilities entering the market. These factors represent positive data points for the downtown Portland market in 2025. Unlike suburban markets, downtown Portland did not face substantial unoccupied spaces to backfill over the past year.

In contrast, suburban areas saw little change from a macro perspective over the last 12 months, with challenges persisting due to significant vacancies and limited demand for large suburban office space. As in previous years, a small number of properties in certain submarkets accounted for the majority of the empty space. For example, the Maine Mall area submarket had new vacancies hit the market with little activity on the demand side to help soften the blow, and a notable downsizing by one company left a large building in Falmouth unoccupied. While smaller buildings have experienced increased demand and a decline in vacancy rates, these positive trends have been overshadowed by larger companies vacating their spaces over the past few years. Unless demand for spaces over 30,000 square feet rises significantly in 2025, suburban markets are likely to continue facing higher vacancy rates. On a positive note, the medical office market remains robust, with a low vacancy rate of just 1.33%. While there are slightly more opportunities in this sector than in recent years, it remains a tight market, as evidenced by strong activity and several sizeable leases at the soon-to-be-completed Rock Row medical campus in Westbrook.

Looking ahead, large vacancies will likely continue to be slow to lease, preventing dramatic reductions in overall vacancy rates. However, the positive trend of decreasing sublease space is expected to support the market throughout 2025 which could lead to more stability across markets. Additionally, demand for office space appears to be at a five-year high as companies refine their understanding of employee workflows, hybrid work schedules, and future space requirements.