After five years of attrition, the U.S. office market has stopped falling. National vacancy slipped to 18.8%, ending a long run of increases and marking the first annual improvement since 2019. Net absorption turned positive for a sixth straight quarter (+16 MSF YTD), signaling that the sector’s bottom has formed — but only for the strongest assets. A bifurcated market now defines the cycle: trophy towers are leasing up while commodity offices edge closer to functional obsolescence.

CBRE data show leasing demand clustering in top-tier buildings with amenities, ESG upgrades, and transit proximity. Their 14.2% vacancy contrasts sharply with 19.1% for older space. Over half of Q3 leasing comprised 10-to-20 kSF expansions by finance and tech tenants upgrading footprints. Landlords of B/C properties, by contrast, face rising vacancy and rent roll-downs. Incentives are surging — up to 12 months free on 10-year leases — keeping effective rents flat despite +1.3% headline growth. In practice, “rents are holding by giveaway,” as one institutional owner put it.

With capital scarce and existing vacancy high, new construction has nearly ceased. Only 16 million SF is under way nationwide, the thinnest pipeline in 10 years. That pause will slowly tighten markets by 2027, but near-term it reflects lenders’ caution. Banks are pulling back: KeyCorp’s office NPL ratio hit 5.1%, and CMBS office delinquencies climbed to 11.8%. In turn, new projects require recourse, interest reserves, and ≤60% LTV leverage. Development discipline — forced as it is — sets the stage for eventual balance.

Transaction evidence confirms bifurcation. Prime CBD assets trade 100–200 bps above 2019 cap rates (≈ 6–7%), while suburban offices clear near 8%. Equity is cautiously returning: distress funds and foreign buyers are bidding 20–30% below peak values for core towers. Meanwhile, REITs such as BXP and SL Green report improving occupancy and sentiment. By contrast, secondary market valuations continue to erode as appraisals reset. Still, the 10-year Treasury near 4% and Fed easing have narrowed risk spreads by ~40 bps since August, hinting that capital discipline — not capitulation — will define the next phase.

Gateway metros are absorbing the recovery’s gains. Fifty-six percent of YTD leasing occurred in New York, Boston, and Washington, buoyed by return-to-office mandates and renewed corporate confidence. In New York City, office attendance has exceeded 50% for the first time since 2020. Meanwhile, Sunbelt markets that overbuilt during the remote work boom are softening: Houston, Atlanta, and Phoenix all reported rising sublease space and negative net absorption. The regional story mirrors the quality story — some markets are simply too young in their cycle to find a floor.

Owners are re-engineering business models. Many are repurposing dark floors into tenant amenities or shared meeting centers, a strategy that trades rentable SF for stickier tenants. Others are pursuing adaptive reuse — residential or hotel conversions now factor into underwriting as residual value plays. Cash-flow stability matters more than headline rent: shorter lease terms (5–7 years) and rich concessions define today’s renewals. For many operators, the goal is not growth but survival until the market normalizes.

Through 2026, expect further polarization. Prime offices could reach 90% occupancy by 2027 with slight rent growth, while Class B/C remain flat or worse. Capital markets will favor refinancing of stabilized trophies; secondary assets will see more note sales and equity recaps. Policy intervention — conversion incentives and zoning relief — will shape downtown recoveries in NYC and Chicago. Long-term, creative destruction will reduce inventory and reset values on a smaller, healthier base. Investors with liquidity and patience stand to benefit from that reset, but timing remains critical: discipline will decide who survives to capture the rebound.