Smaller, but Healthier: What 13.8% Office Vacancy Really Tells Investors

The US office market absorbed roughly 20 million square feet over the past four quarters, its fourth consecutive quarter of positive absorption. That is a real recovery. It is also about what one decent quarter looked like in 2018. The distance between those two framings is the story of the office sector at mid-2026: a market that is genuinely healing, at a scale that no longer resembles the one most investors remember.

To evaluate where the sector stands, I welcomed Phil Mobley, the National Director of Office Analytics at CoStar Group (NASDAQ: CSGP), back to America’s Commercial Real Estate Show. Phil develops CoStar’s house view on office and guides a team of more than 30 local market analysts, which makes him one of the few people who can speak to both the national number and what is happening block by block.

For owners and investors, the headline vacancy rate has become close to useless as a decision input. What matters is which slice of the market a building sits in, and whether its owner has the capital to compete.

The Vacancy Headline: 13.8%, and Not Returning to 2019

National office vacancy is right at 13.8%, down 30 to 35 basis points from a peak of 14.1% a year ago. Vacancy peaked near 12.5% after the Great Recession and sat between 9% and 9.5% in 2019. Phil is direct about the implication: the rate will keep grinding down, but it is not returning to 9.5% any time soon.

What makes this cycle unusual is the direction of the tailwinds. The post-2009 recovery ran on falling interest rates and rising job growth. This one is happening with higher rates and slower job growth, the reverse of both. The average also hides wide variation: San Francisco and New York are recovering strongly, while Washington DC, Los Angeles, and Chicago have not.

The Supply Story: Contraction for the First Time on Record

The supply side is where this cycle genuinely breaks from history.

• Starts at a generational low: New construction is running about 5 million square feet per quarter nationally. Annualized, that is roughly what one strong quarter of starts looked like in 2018.
• Outright inventory contraction: For the past two quarters, CoStar’s data shows more office space demolished, converted, or removed from inventory than delivered. That has never happened before in the data.
• The effect concentrates at the top: New supply always arrives at the highest price point. With almost none arriving, the constraint is felt first in trophy and Class A space, then works downward.

Phil offered one caution worth repeating. These supply reductions are a lagging indicator, not a leading one. Buildings are being converted and demolished because the market already concluded they are not competitive as offices, which makes the removals a response to weak demand rather than evidence of strength.

The Missing Middle: Where the Damage Actually Landed

I have said on the show more than once that office may prove to be the buy of the decade, and that the best space fills first with the next tier following. Phil’s data supports the first half and refines the second.

• Trophy assets, the top 5% of inventory: Resilient through the downturn and performing strongly now. Much of it is newer product that benefited from pre-leasing momentum.
• Solid B and B-minus: Held up better than most people assume. These buildings serve price-sensitive tenants who need a specific location and functional space.
• A-minus and B-plus: Where the occupancy collapse actually happened. Not distinctive enough to win a Fortune 100 tenant against trophy product, and too expensive to compete with commodity space on price.

The trickle-down does happen, but only where demand growth exists to drive it. In Manhattan, where perhaps half a dozen Class A buildings can still accommodate a 100,000 square foot contiguous tenant, that scarcity is backfilling A-minus and B-plus space in the best locations. Elsewhere, cutting asking rents 5% does not solve it, because the problem is positioning rather than price.

Competitive Vacancy: Capital Decides What Leases

The most actionable idea in the conversation is that total vacant space is not the relevant number. Competitive vacant space is. A landlord without the capital, or the willingness, to fund tenant improvements does not really have leasable space, whatever appears on a listing site.

I see this in my own book. I am selling a building in Buckhead where the owner is a group that buys notes and forecloses rather than an institutional owner. The space needs a coat of paint and a general freshening, and because there is no tenant improvement capital or leasing commission behind it, roughly 90% of tenant rep brokers will not put it on a tour list. That vacancy shows up in the statistics while competing for nobody. My own portfolio shows the same spread: buildings at 70% and 40% vacancy, others with none at all.

Two trends follow from the capital question. Lease sizes have run about 15% below pre-pandemic averages for nearly three years, and Phil believes the cause has shifted from tenants downsizing to the simple fact that only smaller spaces remain available. Landlords with capital are responding by building spec suites, because today’s smaller tenants, including newly funded AI companies, want visible quality and speed to market rather than a custom buildout.

The Capital Markets Signal: Buying Office to Keep It as Office

Of the four major commercial property types, office posted the largest year-over-year recovery in transaction volume in 2025. Activity cooled somewhat this year against economic uncertainty, but the more meaningful change is who is buying.

Institutions historically accounted for 25% to 30% of office deal volume by value. That fell to 10% or 15% by 2023 as rising rates worked through pricing, and it is now back near 20%. More important than the share is the intent: these buyers are acquiring buildings to operate them as offices rather than to convert or redevelop them. Average prices and cap rates have gone sideways for several months, which is healthier than it sounds. As the investable slice of the market widens, more buildings trade and some close at lower values, holding the average flat even while liquidity improves.

The user buyer remains a real force, though Phil thinks that window may be closing as institutions return and compete. Many of the office buildings we have taken to market across the Southeast have been won by users and partial owner-occupants. The Two World Trade Center groundbreaking, anchored by an American Express commitment, points at where new construction likely comes from next: occupier demand creating buildings rather than speculative development.

Final Thoughts: A Smaller Market, Worth Underwriting Honestly

Phil’s outlook for the coming quarters is for vacancy to stay structurally high while grinding down, with supply reductions contributing at least as much as demand recovery, and rent growth for desirable assets approaching or exceeding inflation.

I still believe well-positioned office is one of the better opportunities of this decade, with one refinement after this conversation: the opportunity is not evenly available. It belongs to buyers who know which tier a building occupies, who price the tenant improvement capital honestly before closing, and who are not underwriting a return to 2019 vacancy. A smaller, healthier office market is still worth owning. It just requires being right about the building.

Optimize Your Office Portfolio Positioning

Every market cycle creates challenges and opportunities. Business owners who plan early, investors who stay disciplined, lenders who lean in thoughtfully, and agents who continuously improve will be best positioned to succeed in 2026 and beyond. If you’d like to discuss any of these strategies in more detail, feel free to reach out.

Whether you are an owner weighing a sale, an investor evaluating an office acquisition, or a tenant negotiating in a market with less competitive space than the headlines suggest, Bull Realty provides the specialized market intelligence needed to execute clean transactions. Contact our Office Advisory team today to position your portfolio for the cycle ahead.

Michael Bull, CCIM
Michael@BullRealty.com
404-876-1640 x 101
https://www.bullrealty.com