Fourth Quarter 2025
Occupancy Gains Reinforce Inland Empire Office Market Recovery in 2025
Occupancy improved as direct vacancy declined, while stable asking rents and selective investor demand supported market stabilization.
Positive net absorption, lower vacancy, and government-anchored transactions reinforced the Inland Empire’s office market recovery.
MARKET OVERVIEW
The Inland Empire office market continues to show signs of recovery, with broad-based tenant demand pushing occupancy higher and absorbing vacant direct space. While landlords are holding asking rents steady to capitalize on the improving environment, direct vacant space decreased 3.2 percent quarter-over-quarter and 16.4 percent year-over-year. Vacant sublease space fell a solid 4.5 percent quarter-over-quarter, though it nearly doubled year-over-year to 135,149 square feet at year-end. Renewed tenant activity continues to chip away at vacant space, reinforcing the recovery.
In Q4 2025, net absorption, driven primarily by direct space, totaled approximately 557,000 square feet for the year, marking a meaningful milestone in the market’s rebound. The vacancy rate edged down 10 basis points quarter-over-quarter, supported by 106,095 square feet of space coming off the market, and now stands at 4.7 percent, 80 basis points lower than one year ago.
Stabilization has been supported by shifting workplace strategies and evolving remote work patterns. Since the economy reopened following the pandemic, occupied office space has increased by nearly 2.1 million square feet, surpassing pre-pandemic levels. Sublease vacancy has fallen 22.5 percent compared to Q4 2019, aligning with the broader recovery trajectory.
This absorption has kept asking rents stable quarter-over-quarter at $2.32 per square foot on a full-service gross basis, up one cent from the prior quarter and flat year-over-year. While leasing volume slowed quarter-over-quarter, overall 2025 activity softened, declining 24.5 percent year-to-date from the same period a year earlier.
TRENDS TO WATCH
The combination of modest rent adjustments, declining direct vacancy, and steady leasing activity has produced a 4.7 percent vacancy rate, representing a notable 95.3 percent occupancy level. This tightening environment underscores the Inland Empire’s position as a desirable office market. Continued workforce growth and regional job diversification provide a supportive foundation for ongoing business investment.
However, employment sectors that traditionally drive office demand are showing signs of contraction. Unemployment in the Inland Empire reached 5.9 percent in September. Office-occupying sectors continue to underperform, with the most recent data from the California Employment Development Department showing year-over-year job losses of 1,000 in Financial Activities, 400 in Real Estate and Rental and Leasing, and 800 in Professional and Business Services. The Information sector declined by 300 jobs over the past year. In total, core office-demand sectors contracted by approximately 2,500 jobs year-over-year.
These headwinds are partially offset by growth in Private Education and Health Services, which added 15,600 jobs year-over-year, and State and Local Government, which added 10,500 jobs. This bifurcated employment picture tempers near-term office demand while still supporting long-term occupancy stability. The crucial role of these expanding sectors, particularly government and institutional users, is directly reflected in recent high-profile sales activity.
Transaction activity continues to highlight investor and owner-user office demand selectivity. A notable sale includes The Grove Business Park, comprising two office buildings totaling 102,810 square feet at 1450 and 1500 Iowa Avenue in Riverside. Riverside Unified School District acquired the properties for $24.5 million, purchasing 1500 Iowa Avenue (49,202 square feet) for $12.3 million, or $230 per square foot, and 1450 Iowa Avenue (53,608 square feet) for $12.2 million, or $228 per square foot, to serve as its new district headquarters.
Another significant transaction was the sale of a 50,082-square-foot office building at 265 E 4th Street in San Bernardino, fully leased to San Bernardino County. The Krausz Companies, LLC sold the property to a private investor for $12.95 million, or approximately $259 per square foot. Leased to an essential government agency, the building represented a stable, income-producing investment opportunity.
At year-end 2025, the average office cap rate remained flat year-over-year at 6.3 percent, up 40 basis points from 2022, when the Federal Reserve began its rate-hiking cycle. Elevated interest rates pushed cap rates higher, weighing on investor demand and contributing to a 14.8 percent decline in median price per square foot to $207. Total sales volume through Q4 2025 declined 22.5 percent year-over-year to $306 million and was down 51.2 percent from 2022 levels. The average building size sold decreased 13.1 percent year-over-year to 11,678 square feet, reflecting a continued shift toward smaller transactions.
Looking ahead, the Inland Empire office market is expected to remain resilient as it adapts to macroeconomic conditions and evolving employment patterns. Investor and owner-user interest remains selective but durable, particularly for high-quality, income-producing, well-located assets anchored by stable tenancy.
