Office Vacancy Dips Again While Office Loan Delinquency Tops 12%

A recovery that depends on which building you own

The U.S. office market has now put together more than a year of steady improvement. National vacancy is falling, leasing is close to a record pace and almost no new supply is coming. Underneath those numbers, though, the market is splitting apart. The best towers are tightening fast, while older Class B and C buildings keep losing tenants. Many of the loans tied to those weaker buildings are going bad at rates higher than anything seen in the financial crisis.

All of the major third-quarter reports agree on the direction, even though their numbers differ. CBRE puts overall vacancy at 18.2%, down 60 basis points from a year earlier and 10 basis points from the prior quarter. That is its fifth straight quarterly decline.22 Cushman & Wakefield tracks a different set of buildings and reports 19.8%, down roughly 25 to 30 basis points from a Q3 2025 peak of 20.1%.2124 Yardi Research data, published in Hubble's quarterly report, shows 17.8% nationally. That figure barely moved from the second quarter, after five straight quarterly declines from a 19.9% high in early 2025.23

The gap of about two percentage points between these figures comes from methodology: each firm uses different inventory definitions and market sets. The more useful signal is that every one of them shows a peak in 2025 and a slow decline since.

Demand is real, and it favors the best space

The recovery is not just a statistical effect. CBRE says net absorption was positive for the 10th straight quarter and leasing reached 63.8 million square feet.22 Its researchers expect 2026 to beat the 2022 annual record of 238 million square feet.25 Stefan Weiss, who heads CBRE's U.S. office research, said the market has "stopped that bleeding" from hybrid-work downsizing. He also noted that space per employee has been rising slowly for three years.25 New leases make up 61% of leasing so far this year, up from 56% in 2025. That suggests more tenants are expanding or relocating instead of just renewing.25

Return-to-office rules support that reading. In CBRE's occupier survey, 89% of employers now require at least three days a week in the office, up from 78% a year earlier.27 The firm also projects that office-using jobs will grow 0.9% a year over the next five years, faster than the 0.6% expected for the overall economy.25

Most of that demand is going to the top of the market. CBRE's prime vacancy rate fell 250 basis points in a year to 11.9%, and prime vacancy in Midtown Manhattan is just 1.9%.22 Cushman & Wakefield reports a 60-basis-point annual drop in Class A vacancy, with more than 22 million square feet of rolling four-quarter absorption.21 The firm says top-tier vacancy has fallen 215 basis points over two years, while vacancy in Class B and C buildings has kept rising. It calls this a widening performance gap.24

Market-by-market splits

The divergence also shows up between cities. Cushman & Wakefield found net absorption positive over the past year in 52 of the 92 markets it tracks. The biggest gains were in Midtown Manhattan (+6.5 million square feet), San Francisco (+3.5 million) and Orange County (+2.7 million).21 San Francisco's vacancy fell 410 basis points year over year by that firm's count.21

Yardi's quarter-over-quarter data tells a more mixed story. Manhattan fell to 10.2% and Brooklyn dropped more than four points to 10.3%. Meanwhile, New Jersey rose 90 basis points, Chicago and Houston climbed, and the wider Bay Area edged up to 22.9%.23 Austin (24.5%) and Houston (23.6%) still have some of the highest vacancy rates in the country.23

Rents are where the reports disagree most. CBRE reports asking rents up 3.1% year over year, the strongest growth since 2016.2225 Yardi's national average asking rent for traditional office space fell 1.5% in the quarter to $33.18 per square foot, with declines in nine of 14 markets.23 These two findings likely don't contradict each other. Rents are rising in buildings tenants want and falling in buildings they are leaving, and a national average blends the two in ways that depend on the sample.

Shrinking supply is doing much of the work

A lot of the improvement comes from the supply side. CBRE says construction completions fell 76% year over year.25 Cushman & Wakefield says new supply is close to a 30-year low.24 Total U.S. office inventory has shrunk by 42.5 million square feet, or 0.8%, over six quarters as outdated buildings are converted or taken off the market. More than a third of markets are at least 2% below their peak inventory.24 Yardi's analysis also credits falling vacancies partly to weak properties being decommissioned, demolished or turned into housing.23

That is why the vacancy decline should be read carefully. Some of it reflects tenants taking more space. Some of it reflects the denominator shrinking. CBRE expects vacancy to keep drifting down to about 14% by the early 2030s.27 Even that would be well above the roughly 12% rate before the pandemic.25

The loan market hasn't recovered

Commercial real estate lending shows little of the leasing market's improvement. Trepp's office CMBS delinquency rate reached 12.2% in September. That is the second-highest reading on record, just below January's 12.34% peak and well above the 10.7% high of the financial crisis.24 A single loan drove much of September's increase: a $1.1 billion maturity default on eight Hollywood office and studio properties owned by Blackstone Property Partners and Hudson Pacific Properties. The loan was extended 14 months at its original 4.435% fixed rate, and Fitch moved its outlook to negative.3

CRED iQ uses a broader definition that includes performing matured loans. Its office delinquency rate was 13.2% in August, and its special servicing rate was 15.7%. Both are the highest since at least 2019.10 The firm says about $39 billion of office CMBS matures over the next 12 months. Of that, $13.9 billion is not yet distressed but already shows warning signs such as weak debt coverage or falling occupancy.10

KBRA's October data adds detail. Overall delinquency in its rated private-label CMBS universe slipped to 7.7%, but distress rose to 10.3%. Office distress climbed 11 basis points as loans on 101 Hudson Street ($250 million), Huntington Center ($126 million) and 80 Park Plaza ($116.3 million) went delinquent.15 KBRA's overall measures are still lower than a year ago.5 The Mortgage Bankers Association found CMBS delinquency rose to 4.97% in the third quarter, with office the weakest property type. It also reported that delinquency at other lenders stayed low by historical standards.96

The main point is that the stress is concentrated, not spread across the whole system. Securitized office debt, especially conduit loans, is where the damage sits. CRED iQ puts conduit office delinquency at 14.4%.10 Many of those loans were made at pre-2022 valuations on exactly the commodity buildings now losing tenants. A leasing recovery led by trophy towers does little for a borrower with a half-empty 1980s building and a loan coming due.

REITs and the data center comparison

Public markets have priced in the same split. Data center REITs returned 33.2% in the first half of 2026, with 29.4% growth in funds from operations in the first quarter.12 Census data shows data center construction spending reached a $50 billion annual rate in March, up 34% from a year earlier. Office construction was $46 billion, its lowest since 2015. The two crossed earlier in the year.1119

This gives some investors a reason to look at office again. Analysts have noted that SL Green, BXP and Hudson Pacific trade at roughly 9 to 11 times forward earnings. SL Green and Hudson Pacific trade below book value.16 With only 19.7 million square feet of office under construction nationwide, owners of top buildings have pricing power they haven't had in years.16 The Hollywood default is a reminder, however, that even REITs with well-known leasing wins can carry serious debt problems.3

The two sectors are also meeting directly. In Chicago, Legacy Investing and GI Partners are converting the former Cboe headquarters at 400 S. LaSalle into a 33-megawatt data center. The project is expected to cost $300 million to $400 million, with rents up to four times the downtown office average. The building sold for $12 million in 2024 and then for $40 million after its power supply was upgraded.1418 JLL's Peter Skae cautioned that most office buildings lack the ceiling height, floor strength and power for this use. He estimated that 95% of municipal buildings he has been asked about wouldn't work.14 Data center conversions will be rare. Housing will remain the main exit: CBRE says just over 70% of conversion square footage is headed for multifamily.20

The takeaway

The best reading of the third-quarter data is that the U.S. office market has hit bottom, but unevenly. Prime space is recovering on real demand and very little new supply. Commodity buildings are being cleared out through conversion, demolition and, increasingly, foreclosure. The fall in national vacancy is real, but a meaningful share of it comes from buildings leaving the inventory. The coming test is the wave of office loan maturities: if vacancy keeps falling while delinquency stays above 12%, the recovery is passing those loans by.