A version of this article first appeared in the CNBC Property Play newsletter with Diana Orrick. Property Play covers new and evolving opportunities for real estate investors, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large publicly traded companies. Sign up to receive future editions directly to your inbox.
Just a few years after what some saw as the collapse of the U.S. office market due to the pandemic, the sector is returning to health at an unexpected speed. This rapid recovery has created a shortage of premium space in particular.
The office market has recorded five consecutive quarters of positive net absorption, adding 6 million square feet of occupancy in the third quarter of this year, according to a new report from JLL. And employers are expanding, with their currently signed lease footprint increasing by an average of 13%. Just two years ago, the main theme in the office was downsizing.
All of this happens at a time when supply is decreasing and demand is decreasing faster than it can recover. Only 3.5 million square feet of new office space was delivered in the third quarter, matching the near-record shortage seen in the second quarter. At the same time, 9.6 million square feet were removed through conversion or redevelopment. Since the end of 2023, office space inventory nationwide has decreased by 45 million square feet.
Only 23 million square feet of new office space is currently under construction, but as demand for luxury offices soars, this new space is becoming increasingly scarce. JLL views this as a “flight to scarcity.” As a result, the rent has finally increased.
Effective rents for first-generation trophy space are now up more than 20% compared to the third quarter of 2025. Due to the lack of available trophy space, more occupiers are currently flowing into second generation spaces. As a result, rents in that sector are increasing by 10% each year.
“Office is really coming back right now…If you own it, or if you bought it 18, 24 months ago, you’ve done incredibly well in offices in San Francisco and New York,” Willie Walker, CEO of commercial real estate finance and advisory firm Walker & Dunlop, told CNBC’s “Closing Bell Overtime.”
As always, there are strong local promoters for the various metropolitan markets. Technology leads the way in San Francisco and Austin, with the highest net absorption rates. Demand is also strong in the Sunbelt market, with rental volumes in the Gateway area increasing 13% year-on-year. The smaller tertiary market is back at about 95% of 2019 lease volumes.
With supply shrinking and demand increasing, the construction industry should recover, but that is not the case.
“This is the perfect time to put shovels in the ground, except no one is doing it,” Walker said, noting that office construction this year has reached about 9% of the normal annual supply. “It’s a great time to start projects that will be delivered within the next two to three years. The question goes back to equity capital. There’s no equity capital going there at the moment. As a result, you’re going to end up with a supply-constrained market. What will that do? It’s going to drive up rents.”
