Office Vacancy Falls to 18.3% as Small Tenants Drive Recovery

The turn becomes a trend

About a year ago, CBRE reported something the U.S. office market had not seen since the pandemic: national vacancy fell compared with a year earlier. The rate was 18.8% in the third quarter of 2025, down from 19% a year before. CBRE's Stefan Weiss noted that 19% was a level the market had not reached since 1992, after the savings and loan crisis.21 Small occupiers did most of the work. Leases of 10,000 to 20,000 square feet made up 56% of leasing that year through the third quarter. The number of transactions was 26% above the 2018–2019 average, but the average deal was 24% smaller.21

That first dip now looks like the start of a trend. CBRE's second-quarter 2026 report put vacancy at 18.3%, down 30 basis points in one quarter. That was the largest quarterly drop since 2015.23 CBRE also said 2026 leasing is on pace to beat the 2019 pre-pandemic total for only the second time, after 2022.28 Other trackers report the same direction. Cushman & Wakefield's third-quarter 2026 data showed net absorption positive for a fifth straight quarter. Vacancy has also been lower than a year earlier for three quarters running.2 Yardi Matrix put national vacancy at 17.8% in August, down 90 basis points from a year earlier.4

The headline numbers do not match, and that matters. CBRE reports 18.3%, Cushman & Wakefield 19.8% and Yardi 17.8%, because each firm measures differently.2314 Newmark reported vacancy up 30 basis points year over year, to 20.4%, as recently as its mid-2026 overview.9 So the exact level depends on who is counting. The direction is harder to dispute. Most major trackers now show vacancy falling, though some only slightly.

Why the market is tightening: less supply, not booming demand

This recovery owes more to shrinking supply than to a surge in demand. CBRE says 2025 was the first year since it began tracking in 1988 that demolitions and conversions removed more space than new construction added. Net absorption that year was still 14% below the 30-year average.22 Cushman & Wakefield counts a 42.5 million-square-foot drop in U.S. office inventory over six quarters. Only 7.1 million square feet was delivered in the first three quarters of 2026, roughly a fifth of the historical average.562 JLL estimates inventory is down about 45 million square feet since 2023.58

This also explains why small tenants have mattered so much. CBRE linked the early turn to renewals running above pre-pandemic levels, and expected them to stay high because moving and construction costs are elevated.21 CoStar describes the same squeeze. Per-worker space needs have stabilized, but high construction and financing costs, plus slow renovations, leave large tenants few places to move. Leasing over the past four quarters averaged 105 million square feet, still about 10 million below the 2015–2019 average.53 Put simply, many tenants stay where they are, and large blocks of new space barely exist.

There are signs this is changing. CBRE's 2026 outlook said large urban users were starting to return after four years of weak market share, and that gateway markets were set to rebound.22 The firm's 2026 occupier survey found technology firms driving demand in gateway markets. Large enterprises are still shrinking, but less aggressively than before.23 CompStak reports that AI companies took 51.1% of technology, media and telecom leasing in 2026, up from 20.2% in 2025. They paid starting rents about 18% above other tenants.54

A two-tier market

The sources agree most strongly that the recovery is uneven. Cushman & Wakefield says vacancy in top-tier buildings has fallen 215 basis points in two years, while Class B and C vacancy has kept rising.56 CompStak counts seven of ten gateway markets recovering in Class A, while five are declining in Class B and C.57 JLL says effective rents for trophy and newly built space have risen more than 20% a year since 2023.58 Washington, D.C. shows the split clearly. Trophy vacancy there fell to a post-pandemic low of 7.7% in the third quarter, while vacancy across the wider D.C. market rose to 19.9%.10

CBRE expects vacancy in prime buildings to return to pre-pandemic levels by the end of 2027. It also expects demand to spill over into next-tier buildings near prime ones.22 Taken together, the data support that view. Once the best space fills, tenants who need to move will have to accept the next best option. That should help well-located older buildings. It will not save obsolete ones, which are more likely to be demolished or converted.

The debt market hasn't caught up

Lower vacancy has not yet eased stress in commercial real estate lending, and may not for a while. CRED iQ reported office CMBS delinquency at 13.2% in August 2026, the highest since at least 2019, with special servicing at 15.7%.14 Trepp's office delinquency rate rose to 12.00% that month.13 Wolf Street, citing Trepp, reported 12.2% in September.18 Morningstar DBRS uses a broader definition and put office delinquency at 14.87% in August.19

The main problem is refinancing, not missed payments. CRED iQ says 71% of distressed office loan balances come from refinancings that have failed or are about to. Even fully leased buildings have run into trouble.14 Early this year, analysts estimated that more than $100 billion of CMBS loans would mature in 2026 and that over half would not pay off. They also noted that lenders were losing patience with "extend and pretend."1720 Most office loans were written when buildings were worth more and rates were lower. Tighter leasing helps the cash a building earns, but it does not restore those valuations. That is why delinquency and vacancy are moving in opposite directions.

Distress is also setting new prices. Flynn Properties paid about $221 million for the $350 million loan on 225 Bush Street in San Francisco, then took the 55%-occupied tower through a deed in lieu of foreclosure.55 Deals like this let new owners start with a low cost basis. That can help a recovery overall while wiping out the previous owners and lenders.

REITs: cheap for a reason, or simply cheap

Public office REITs reflect this mixed picture. MarketBeat says SL Green, BXP and Hudson Pacific trade at about 9 to 11 times forward earnings, far cheaper than data center REITs such as Equinix and Digital Realty. SL Green raised its guidance in July.51 Short interest in SL Green is still around 16.9% of shares available to trade, a sign of continued doubt.51 For Bay Area landlords, the gap between headlines and finances is wider. Hudson Pacific signed San Francisco's largest office lease since 2018. Yet its cash rents on new leases fell 11.4% last quarter, and Kilroy's occupancy stood at 77%.5155 Net-lease REITs, meanwhile, face refinancing with the 10-year Treasury yield above 5%.60 High rates weigh on property values across the sector.

Data centers and apartments: the comparison

The office recovery looks small next to data centers. CBRE counted a record 7,481 MW under construction in primary North American markets in the first half of 2026. More than 80% was already preleased, and vacancy hit a record low of 1.4%.32 Census data show data center construction running at about $75.2 billion a year in July, up roughly 57%, while total U.S. construction spending fell.37 By April, data centers had passed general office buildings in private construction spending.34 Data centers face a shortage of buildings, while offices are still working through too many. One sign of the overlap: CoreSite bought three Silicon Valley office properties zoned for data center redevelopment.31

Apartments are not seeing broad rent increases. Instead, rents are holding steady. Apartment List puts the national median at $1,388, down 0.4% from a year earlier. That annual figure has improved for five straight months since bottoming at -1.6% in April.41 Apartments.com reports a 0.8% annual gain.43 Gains are concentrated in the Northeast, Midwest and parts of the West Coast, while Sun Belt markets work through oversupply.44 The office story touches apartments too. Office-to-apartment conversions take office space off the market, and in Cleveland they are adding luxury rental units downtown.43

The bottom line

Office vacancy has clearly turned, but it has turned because supply is shrinking more than because demand is booming. Over the past year, small tenants and renewals kept leasing alive while new construction nearly stopped and old buildings left the market. Large tenants and AI firms are now adding demand at the top of the market. Those gains are real but concentrated in the best buildings, and the debt problems from the last cycle remain. For lenders and owners of average buildings, the tougher period is likely still ahead, even as vacancy rates improve.