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

In 2025, office building sales grew by 35% nationally. Annual leasing activity shot up more than 5% year-over-year in the fourth quarter, and vacancy rates fell nearly 1.5% to 18.4%.

In Chicago alone, there were 37 transactions of buildings over 20K SF last year as leasing rebounded — a 28% hike from the year prior. Notable sales include the 800K SF 190 South LaSalle for $55M in Q4 and the 1.6M SF 600 West Chicago for $88.6M in Q1 2025.

But while these major sales tell a story of a post-pandemic comeback, the office market has fundamentally shifted over the past several years — and these big transactions catching everyone’s attention are perhaps distorting the reality of what’s really happening, said Adam Johnson, executive vice president of the office capital markets group at NAI Hiffman.

“Small office spaces are healthier than large, institutional spaces right now,” Johnson said. “When you see a big tenant deal get done, a lot of times you have so many people chasing that one deal, you end up getting negative press because of how aggressive the terms have to be. When more of these deals are out here, you won't have to be quite as aggressive, but right now, it’s a race to the bottom to fill big vacancy holes.”

Johnson said that even though big deals are inching back, office is generally still in reset mode.

Coming out of the pandemic era, office was being talked about in terms of viability. Would the office sector survive at all? Would workers ever return? What did this mean for owners and investors?

But now that it is clear that companies have come back to the office and investment dollars are flowing back into the sector, the conversation has shifted from whether the sector will survive to how it should be valued. This shift is largely driven by increased construction prices and concessions now required to close deals, he said. 

“In a perfect world, construction pricing goes up 40%, so rental rates go up 40%,” Johnson said. “This really just hasn’t been the case.”

Other areas of the commercial real estate market, such as industrial and multifamily, have witnessed substantial pricing increases since 2020. Across the nation, apartment rents have risen an average of 20%. Approximately one-third of U.S. industrial markets saw rents rise by more than 50% since 2020. 

The majority of the U.S. office market, however, saw modest growth in the single digits during the same period, if at all, Johnson said. 

“Covid really exposed the office market where it sat,” Johnson said. “There was a lot of overbuilding that happened, so the basis of these buildings needs to be reset.”

Johnson said this reset is necessary to address a gap in the market: Rental rates remain largely the same while costs to build, improve and operate rise. Tenants expect their workspaces to be modern and amenitized. As a result, landlords are forced to spend more money if they want to attract and retain tenants, putting upward pressure on rent rates, he said. 

In Chicagoland, Johnson said, office buildings of 100K SF or more have an average vacancy of 30%. But a deeper look at NAI Hiffman’s research shows that buildings in the 50K SF to 100K SF category are seeing an average vacancy of 23%. Buildings even smaller than this, in the 20K SF to 50K SF range, are seeing rates as low as 16%. 

The segment of the market with the least vacancy is the sub-20K SF category, with an average vacancy rate of 10%. And that isn’t only true in Chicago — this is part of a trend across the country, he said. 

“The smaller office buildings are faring better than the larger buildings, even though those large buildings are all you hear about,” he said. “Smaller buildings typically are made up of smaller local tenants. They tend to be stickier because they tend to work where they live.”

In the corporate world, tenants fluctuate in size more often than smaller companies, Johnson said. Corporations buy and sell office assets all the time due to relocation, downsizing, team expansions and more. Smaller buildings with smaller tenants, on the other hand, tend to be more stable, with lower transaction costs, construction numbers and tenant improvement fees. 

Small to midsized office assets are also more stable than larger buildings because there is no dependence on anchor tenants, or tenants who occupy 25% or more of the building’s total square footage. When owners lose a tenant like this, it turns their cash “upside down,” Johnson said.

“That's where you start to have some of these problems,” he said. “They are also the ones that require larger build-outs and planning timelines, so filling these spaces takes much longer. Up to two years, in some cases. It's just a bigger hit.”

Additionally, small buildings lend themselves to more owner-users, Johnson said. Most prospective tenants searching in the 300K SF range don’t typically buy space anymore. They tend to lease for flexibility. 

Smaller office owners typically sell their properties for a higher price per square foot because owner-users are usually willing to pay more for a building they will own and occupy, Johnson said. 

“They value not only the income from other tenants but also the control that goes along with the ownership of the building, so these values don’t dip as low,” he said.

Johnson said that moving forward, owners and investors in Chicago and beyond must navigate their markets carefully. NAI Hiffman advises clients on a few main points when seeking new office opportunities, including making space easy for tenants to exit and enter, as well as knowing the local market so they aren’t an outlier.  

“You have to make it easy for the tenants to leave or enter space. That’s why spec suites are so popular,” he said. “Knowing the market you’re in so you can make quick and active decisions is also so important. You don’t want to be the one person buying a 40K SF office if the market is made up of 2K SF tenants.”

The same goes for for-sale pricing, Johnson said. If everybody else in the market owns a building for $100 per SF, the last thing anyone wants to do is purchase for $150 per SF. Understanding comparables is essential, he said. 

“Our mission is to make things easy for our clients,” Johnson said. “Don't overcomplicate things. With these parameters, our clients end up doing well with their decisions.”

This article was produced in collaboration between NAI Hiffman and Studio B. Bisnow news staff was not involved in the production of this content.

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