Office Vacancy Dips to 19.8% While Older Buildings Fall Behind

A national number that hides two markets

The U.S. office market is finally reporting a decline in vacancy. Inside that decline, though, the gap between the best buildings and everyone else keeps getting wider. Cushman & Wakefield's third-quarter 2026 MarketBeat puts national vacancy at 19.8%. That is roughly 25 to 30 basis points below a year earlier and the third straight quarter of year-over-year improvement.2531 Net absorption was barely positive for the quarter at about 50,000 square feet. It was still the fifth positive quarter in a row, and the four-quarter total came to 15.5 million square feet.3132

The same report undercuts the idea of a broad recovery. Vacancy at top-tier properties has fallen 215 basis points over two years. Vacancy in Class B and C buildings has kept climbing over the same period, a split the firm itself calls a widening performance gap.2532 This article reads the market that way: the national average is getting better mainly because the top of the market is pulling it up, not because the whole market is lifting.

Where the data agree, and where they don't

The exact vacancy rate depends on who is counting. In the second quarter, CBRE put national vacancy at 18.3%, Cushman at 20.1% and Newmark at 19.9%. Their net absorption estimates ranged from slightly negative to nearly 17 million square feet.21 Moody's Analytics had called a national record of 21% in early 2026.27 An August summary of a separate dataset showed vacancy at 15.8% in June.34 These gaps come from different methods, such as whether sublease space counts as vacant and which buildings are in the survey. Analysts tracking Chicago have noted the same problem at the city level.27

The direction is what matters, and on that the major firms agree. Vacancy has stopped rising and is starting to fall. Sublease space is shrinking. Very little new construction is coming.21 Cushman reports that sublease availability has dropped for ten straight quarters. At about 89 million square feet, it is 33% below its early-2024 peak and at its lowest level since late 2020.32 Sublease space has historically peaked before overall vacancy, which is why brokers treat the decline as a leading indicator.32

Gateway rebound, uneven elsewhere

The biggest gains are in a small number of large markets. Over the past year, Midtown Manhattan absorbed 6.5 million square feet, San Francisco 3.5 million and Orange County 2.7 million.31 Vacancy in San Francisco fell 410 basis points to 29.3%. New leasing there is on pace for a record year, and artificial intelligence companies account for 29% of active tenant demand.35 Manhattan vacancy dropped to 12.6%, its lowest since before the pandemic. Brokers say demand there comes from finance, law and tech rather than a single industry.36

The picture is weaker in much of the rest of the country. Houston vacancy was 25.6% in the third quarter, up 30 basis points from a year earlier. Leasing activity was 42% below the city's 16-year third-quarter average.40 Suburban Chicago vacancy has stopped rising, but mostly because buildings have been removed from the market. The suburban office stock has shrunk from almost 100 million square feet to 93.2 million, and absorption is still volatile.38 Earlier summaries reached the same conclusion: leasing is concentrating in gateway and Sun Belt metros, while the Midwest and cities tied to specific industries lag behind.34

Among the 92 markets Cushman tracks, vacancy fell year over year in 48.25 That is just over half. It counts as a broadening recovery, but it also means the other half has not turned.

Fewer buildings, not just more tenants

The supply side helps explain why the headline rate is falling. Cushman says total U.S. office inventory has shrunk by 42.5 million square feet, or 0.8%, over the past six quarters. In more than a third of markets, inventory is down at least 2% from its peak.32 Completions this year are on track to tie the lowest total in more than 30 years.33 The national construction pipeline is about 19.7 million square feet, around 0.4% of existing stock.24

Conversions to housing account for much of the removed space. Industry tallies put the office-to-apartment pipeline at about 90,300 units at the start of 2026, up 28% from the year before. New York has the largest share.4 The economics only work in certain cases. Conversion costs are commonly cited at $300 to $500 per square foot, and the deals that close usually involve very cheap purchase prices, residential rents of at least $3 per square foot, and public subsidies.12

This matters for interpreting the vacancy number. When obsolete buildings leave the inventory, the vacancy rate falls even if no new tenants arrive. Suburban Chicago shows this clearly: removing supply has made the vacancy rate look stable while underlying demand stays weak.38 A falling national rate is good news, but part of the improvement comes from the denominator shrinking.

Data centers overtake offices in construction spending

Construction spending shows where development capital has gone. In April 2026, U.S. private construction spending on data centers reached a seasonally adjusted annual rate of $50.7 billion, passing office construction at $43.8 billion for the first time on record. Data center spending was up about 27% from a year earlier.6

The two sectors are also starting to overlap physically. In Chicago, Legacy Investing and GI Partners are converting the former Cboe headquarters at 400 S. LaSalle Street into a 33-megawatt data center. The project is expected to cost $300 million to $400 million and could earn rents up to four times the downtown office average.9 The building has changed hands quickly. It sold for $12 million in 2024, and after the owners secured more power from the utility, it resold for $40 million in late 2025.9 The deal shows that access to power can now be worth more than office space.

This kind of conversion will stay uncommon. A JLL managing director points out that typical office buildings provide about 15 watts per square foot, while data centers need six to seven times more. Office ceilings of roughly 12 feet are also well below the 18 feet data halls usually require.9 Data centers can take a few obsolete buildings off landlords' hands, but they will not clear out the Class B stock in any meaningful amount.

The debt side has not turned

Commercial real estate lending shows no recovery yet. Trepp's office CMBS delinquency rate was 12.16% in September 2026, up 16 basis points for the month.16 It hit an all-time high of 12.34% in January, driven partly by very large Manhattan loans.1218 The overall CMBS delinquency rate rose to 8.02% in September, the highest since November 2020.16 The special servicing rate reached 11.49%, its highest since February 2013.14

The loans going bad are large and mostly office-related. September's biggest new delinquencies included a $1.10 billion Los Angeles studio-and-office portfolio, a $470 million two-tower office complex in Houston, and office loans in Denver and Silicon Valley.16 Trepp has said most new office delinquencies are maturity defaults. Many of these buildings still produce cash flow but cannot refinance at current interest rates, and resolving them can take years.12

Trepp expected office delinquency to peak in 2026 somewhere between 12% and 13%.12 The data so far fit that forecast. The rate has stayed around 11.5% to 12.3% all year without breaking out.131716 The lag is expected: office distress after the financial crisis did not peak until 2012, well after the economy recovered.12 Leasing improves first, and loan performance follows years later.

What it means for REITs and lenders

For real estate investment trusts, the split in the market should benefit owners of the best buildings. Analysts argue that AI-driven leasing and stricter office attendance policies are both competing for the same top-tier space, giving those landlords pricing power they have not had in years. Meanwhile, SL Green, BXP and Hudson Pacific trade at roughly 9 to 11 times forward earnings, and SL Green and Hudson Pacific trade below book value.10 Middle-tier assets are selling at cap rates near 9%. Cousins sold two noncore buildings at about that level in the second quarter.21

The main risk is that this recovery depends on tenants moving between buildings rather than on hiring. One analysis notes that white-collar employment is flat. If the 10-year Treasury stays above 4.5%, it argues, Class A vacancy cannot fall much further.21 Owners and lenders of older buildings face rising tenant improvement costs, flat rents and refinancing at higher rates. These are the loans showing up on Trepp's monthly delinquency lists.

In short, the office market's decline appears to have bottomed at the national level. The improvement is concentrated in top buildings in top cities, and shrinking supply is doing as much work as new demand. Older buildings in weaker markets are still losing tenants, and loan defaults will keep showing it for some time.