Office Vacancy Falls to 19.8% as Office Loan Distress Hits New Highs

The office market is improving, but office debt is getting worse

The U.S. office market now sends two very different signals. On the leasing side, the trend is improving slowly. On the lending side, distress keeps climbing. Cushman & Wakefield's third-quarter 2026 U.S. Office MarketBeat puts national office vacancy at 19.8%. That is 25 basis points lower than a year earlier and the third straight quarter of year-over-year improvement.11 Net absorption was a small positive 50,000 square feet for the quarter. Even so, it was the fifth positive quarter in a row, and the trailing-year total reached 15.5 million square feet.11

David C. Smith, the firm's head of Americas insights, called the signs of stabilization "increasingly consistent." He pointed to continued tenant demand, shrinking sublease space and the removal of obsolete buildings from the competitive inventory.11 Lender data from the same weeks looks much worse. Trepp says the overall CMBS delinquency rate rose to 8.02% in September, the highest since November 2020. Office delinquency rose to 12.16%.5

Both can be true at once. Demand for office space can level off while loans written for a different market keep failing. The gap between the two will shape commercial real estate through 2027.

What the Cushman & Wakefield numbers show

The most useful figure in the report may be sublease space, not vacancy. Vacant sublease availability has fallen for 10 straight quarters to 89 million square feet. That is the lowest level since late 2020 and 33% below the peak in early 2024.11 It now equals 1.6% of total inventory, close to the long-run average of 1.5%.11 The firm notes that sublease space usually peaks before overall vacancy does. Sublease space topped out in the first quarter of 2024, and headline vacancy peaked at 20.1% in the third quarter of 2025.11 If that pattern holds, the market has already passed its low point.

The supply side helps the recovery. Only 7.1 million square feet of new office space was delivered in the first three quarters of 2026, about one-fifth of the historical average. Full-year completions are on pace to match the lowest total in more than 30 years.11 Total office inventory has also shrunk by 42.5 million square feet, or 0.8%, over six quarters as outdated buildings are converted to other uses.11 Cushman & Wakefield had earlier projected that developers would start 9.5 million square feet of office-to-residential conversions in 2026, more than twice the 2025 volume.16

The recovery is uneven by building quality. Vacancy in top-tier buildings has fallen 215 basis points over two years, while vacancy in Class B and C buildings has kept rising.11

The firms disagree on the vacancy level, not the direction

Research firms report very different vacancy figures. Yardi's CommercialCafe put national vacancy at 17.8% in August, down 90 basis points from a year earlier.20 CoStar's estimate was just under 14% in the second quarter.35 Cushman & Wakefield's figure is close to 20%.11 Most of the gap comes from methodology. Yardi, for example, counts only buildings of 25,000 square feet or more and leaves out owner-occupied properties.32

The firms do agree on the direction. All of them describe vacancy that is flat to falling, very little new construction and demand concentrated in the best buildings. CoStar is the most cautious. It expects net absorption to slow from 13 million square feet in 2026 to 5 million in 2027, which is lower than its earlier forecast. It also warns that AI-driven efficiency could reduce how much space each worker needs.35 Yardi notes that employment in office-using sectors fell by 62,000 jobs over the past year even as total payrolls grew.20 That is a weak base for a strong rebound in demand.

Local reports follow the same pattern. Long Island vacancy fell to 11.6%, helped largely by demolitions that have cut inventory by 8.2% since 2020.39 In New Jersey, leasing rose but vacancy climbed to 21.7%.15 In Phoenix, a local market leader said the city is seeing a flight to quality rather than a broad recovery.19

Office loans: distress keeps rising

If leasing is turning slowly, office debt is not. CRED iQ reported office CMBS delinquency, including performing matured loans, at 13.2% in August. That is the highest since at least 2019. Its special servicing rate reached 15.7%.3 Early September reports were running above 14% delinquent.8 Morningstar DBRS put office delinquency at 14.87% in its August analysis.6 Trepp's measure is narrower and lower at 12.16%, but it too was rising.5

The main cause is maturing loans. CREFC reported that non-performing matured balloon loans made up 81% of newly delinquent balances in August.10 In other words, most new defaults come from loans that reach maturity and cannot be refinanced, not from missed monthly payments. Yardi counts $289.2 billion of office debt that has recently matured or will mature by the end of 2028. Nearly 59% of it was written before 2021.20 Yardi research director Peter Kolaczynski expects more delinquencies and distress.20

CRED iQ's data also shows that a full building does not protect a loan. Crossroads III in Sunnyvale is fully leased, with Apple as its largest tenant. Its $209 million loan still went to special servicing and received a default notice on September 1.3 About $39 billion of office CMBS matures over the next year, and $13.9 billion of it already shows warning signs.3

The key point is this: the improvement in leasing is happening mostly in the newest buildings, while the distress sits mostly in loans on older ones. Better national vacancy figures will not save a 2019 loan on a Class B tower.

REITs: performance splits by property type

Public real estate markets show the same split. The FTSE Nareit All Equity REITs index returned 7.9% through September 30, despite a 5.7% drop in September and higher Treasury yields.25 Hotel, data center and senior-housing REITs posted double-digit gains, while apartment REITs lagged because of oversupply.25 One count put data center REITs up 33% for the year, more than twice the 15% gain across all REITs.26

Digital Realty has 1.4 gigawatts under construction at a cost of $20 billion, with 63% already pre-leased.23 Wall Street firms are now offering data center exposure to more investors. Blackstone listed a data center REIT in May, and Blue Owl is reported to be weighing a public vehicle.27 Critics note the risks, including power and permitting limits, refinancing and liquidity.27 Blackstone's REIT has performed poorly since listing and was still pre-revenue as of its second-quarter filings.21

Data center construction is pushing up costs

The data center boom affects office owners directly. Cushman & Wakefield's construction research found that contractors working on data centers had an average backlog of 11 months, compared with 8.5 months for those without that work. Architecture billings for commercial and industrial projects have stayed below the growth threshold in nine of the last 10 months.14 Data centers and grid upgrades are driving prices higher for electrical equipment, up 13% year over year, and switchgear, up 9%.14

This may be the most underrated threat to the office recovery. Tenant build-outs, upgrades and office-to-housing conversions all need the same copper, transformers and specialized electricians that hyperscalers are buying up. Any landlord trying to upgrade an older building now competes with AI projects for materials and labor.

Apartment rents: rising or not, depending on the measure

The apartment market, which is absorbing much of the converted office space, is also recovering slowly. CoStar's Apartments.com reported 1.5% annual rent growth in September, up from 1.0% a year earlier, with a mild 0.08% monthly dip.45 Yardi Matrix measured 0.7% annual growth.48 Apartment List showed rents still 0.4% lower than a year ago, but improving after hitting -1.6% in April. Its vacancy measure eased to 7% from a February peak of 7.3%.42

The strongest rent growth is in tight markets like Chicago, New York and San Francisco. Sun Belt markets with heavy new supply, such as Austin and Houston, are still seeing declines.48 Rising rents in big cities help the case for converting offices to apartments there. Cleveland's conversion pipeline is already pushing up downtown rents.41

The bottom line

The Cushman & Wakefield report is right that office fundamentals have bottomed. Falling sublease space, record-low construction and shrinking inventory support that conclusion. But stabilization is not the same as recovery. Demand growth is modest, and forecasters such as CoStar are lowering their expectations.35 The upturn is concentrated in a small set of high-end buildings.

In the meantime, the debt problem tied to older buildings is still building, and it has its own schedule. For investors, the right question is no longer whether the office market is recovering. It is which buildings, which loans and which markets will benefit. Over the next 12 months, the leasing data will probably keep improving while loan defaults keep rising.