The office market has normalized, and both tenants and landlords can now look ahead to see what the future holds. In most office markets, the majority of pre-2020 leases have expired, whereby tenants have been able to resize and reset their footprint to their new hybrid and remote specifications. While there are still some large longer-term leases set to expire in the next 2-4 years that are likely to produce further corporate square footage reductions, those downsizings will be spread over time and will likely not stack material inventories onto the market at any one time.
National Office Submarkets Show Stability and Some Improvement
The graph below shows availability rates for January 2024, 2025 and 2026 in the major U.S. metro markets. Across these markets, 42% of the metro areas show declines in availability, 42% show equilibrium and only 16% show continued deterioration.
The strongest recovery markets over the last year include San Francisco and San Jose, benefitting from the growth of AI and the tech job market, taking off 4% and 2.6% respectively. New York and Charlotte each saw a 2-point improvement, as more financial services companies are demanding that their employees get back into the office. Atlanta and Phoenix also saw gains, with 1.2% and 1.5% improvements respectively over the last year. For those still increasing availability, Los Angeles continues to suffer from job losses in the local entertainment industry, and all of the underlying industries that support Hollywood, with relatively high unemployment. When combined with hour-long commutes being the norm, many companies now work hybrid, with a significant number of remote workers, allowing more reductions in space at lease expiration. Boston has spiked, as it is one of the few metro areas where biotech wet lab space availability is commingled with traditional office space. Combined with an oversupply of new construction and wet lab space that has come back to market by biotech companies subleasing or downsizing, office availability in Boston has increased significantly. Salt Lake City, up a full percentage point in the last year, is just settling into the post-Covid market reality.
Many Metro Areas Stuck in Neutral
All of the other metro areas are essentially running in place, with many companies renewing their leases. The current challenge in these stagnant office markets is that the sheer amount of square footage now on the market is at historic levels. While many U.S. markets have seen percentage availability rate spikes like this before, these current percentages are on a much larger base inventory of space. The amount of office space in the U.S. has increased by 50% over the last 30 years, growing from 7.6B SF to now 11.5B SF. As a result, 20% availability in a market that is 50% larger than it was three decades ago, translates into roughly 50% more actual square footage on the market. It will remain to be seen whether future market conditions can create an influx of white-collar jobs to absorb the national excess of office space in a meaningful way within the next decade.
Sublease Inventory Starts to Return to Normal
One of the reasons that markets are normalizing around the U.S. is due to the burning off of sublease space, whereby good deals have been taken, few new ones have come on the market, and every month, subleases revert back to the building owners as the underlying lease expires. The following chart shows the pre-Covid historic equilibrium of approximately 100M SF of office space for sublease in the U.S., on the market due to normal business climate fluctuations.
Aggregate sublease space spiked to historic levels during Covid, peaking at 2.5x normal conditions at over 250M SF in 2023. Now we are at 170M SF, declining quarterly towards equilibrium almost on a straight-line basis.
The Opportunities Ahead
For commercial landlords, high interest rates, ongoing foreclosures and devaluation of the asset class will continue to occur for at least a few more years. Conversion of office buildings to residential and other uses, or the demolition of the buildings for that same purpose, does not have enough velocity to make a dent in oversupply. What this means for tenants is an extended opportunity to reduce costs and improve the quality of the outcome. Our experience in leading tenants through multiple commercial real estate downturns is making an impact now. A lease restructuring and renegotiation window has opened, where we are representing tenants with lease expirations as far out as 2028 in creating new lease structures.
2026 will continue to be a year where tenants must be well represented and push for the best economics that the market can deliver, as landlords and their brokers continue to hold the line on asking prices, trying to make the market look better than it is. Only by being in the market, can you truly make the market.
Market statistics provided by CoStar Group.
