U.S. office market faces premium space shortage as supply shrinks

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US office market premium shortage

Highlights

U.S. office market posts fifth consecutive quarter of positive net absorption in Q3 with 6 million square feet added and average signed leases up 13%.
New office supply remains historically low with just 3.5 million square feet delivered and 9.6 million square feet removed in Q3, shrinking inventory by 45 million since end-2023.
Effective rents for first-generation trophy offices are up over 20% year over year while ongoing under-construction volume of only 23 million square feet supports continued scarcity and rent growth.

Demand rebound outpaces new office deliveries

As reported by CNBC, citing JLL, the U.S. office market posts its fifth straight quarter of positive net absorption in the third quarter, with occupiers adding 6 million square feet as average signed leases expand by 13%. The shift marks a sharp reversal from two years ago, when downsizing dominated leasing decisions.

Supply is declining more quickly than demand is recovering. Only 3.5 million square feet of new office space is delivered in the third quarter, matching the near-record low seen in the second quarter, while 9.6 million square feet is removed through conversions or redevelopments. National office inventory has fallen by 45 million square feet since the end of 2023.

With only 23 million square feet now under construction, the pool of new premium space is becoming increasingly limited. JLL describes the trend as a flight to scarcity, as tighter availability begins to feed through into higher effective rents.

Rising rents reshape leasing across metro markets

Effective rents for first-generation trophy offices are up more than 20% from the third quarter of 2025, while tighter availability is also pushing more occupiers into second-generation buildings. Rents in that segment are rising 10% annually as demand spills over from the highest-end space.

Market momentum varies by city, but technology firms are leading absorption in San Francisco and Austin. Sun Belt markets also see strong demand, gateway-area leasing volume is up 13% from a year earlier, and smaller tertiary markets recover to roughly 95% of their 2019 leasing volume.

Even with shrinking supply and firmer demand, new development is not accelerating. Willy Walker, chief executive of Walker & Dunlop, says office construction this year is running at about 9% of its normal annual supply because equity capital is still not flowing into new projects, a constraint that he says is likely to keep the market undersupplied and support further rent growth.

Our earlier article on higher U.S. mortgage rates and the jump in adjustable-rate mortgage (ARM) usage explained how rising borrowing costs are squeezing affordability and weighing on both purchase and refinancing activity. We noted that as 30-year fixed rates climbed to multi-year highs, more borrowers shifted toward ARMs for near-term payment relief even as overall mortgage applications fell sharply year over year.

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