'Office' is actually having a scarcity problem

Key points

• The U.S. office market posted its fifth straight quarter of positive net absorption, adding 6 million square feet in Q3.
• New office supply is near record lows, with only 3.5 million square feet delivered in Q3 and 9.6 million removed.
• Effective rents for trophy space are up over 20% year over year, and second-generation rents are up 10%.

The U.S. office market is recovering faster than expected, with demand rising while supply falls, according to a new JLL report. In the third quarter of this year, occupiers added 6 million square feet of positive net absorption, the fifth consecutive quarter of such gains. Signed leases now average a 13% increase in footprint, a sharp turnaround from the downsizing trend of just two years ago.

At the same time, new office supply is shrinking. Only 3.5 million square feet of new space was delivered in the third quarter, matching the near-record low from the previous quarter. Another 9.6 million square feet was removed through conversions or redevelopments, and the national office inventory has shrunk by 45 million square feet since the end of 2023.

Rents climb as trophy space shrinks

With just 23 million square feet of new office space under construction, premium offices are becoming scarce. JLL calls this a "flight to scarcity." As a result, effective rents for first-generation trophy space are now up more than 20% compared with the third quarter of 2025. The shortage is pushing more occupiers toward second-generation space, where rents have risen 10% annually.

Now is the perfect time to be putting a shovel in the ground, except no one's going to do it

— Willy Walker, CEO of Walker & Dunlop

Local markets and construction outlook

Different metropolitan areas show varying strength. Tech hubs San Francisco and Austin lead in net absorption. Sun Belt markets also see strong demand, with gateway area leasing volume up 13% from a year ago. Tertiary markets have returned to about 95% of their 2019 leasing volume.

Despite rising demand and shrinking supply, construction remains low. Willy Walker, CEO of Walker & Dunlop, said on CNBC's "Closing Bell Overtime" that this year's office construction is at about 9% of its normal annual supply. He noted that equity capital is not flowing to new projects, which he said will keep the market supply-constrained and push rents higher.