National Office Market Outlook: What to Expect in 2026

The U.S. office market enters 2026 at an inflection point. After three years of rising vacancy, shrinking valuations, and widespread uncertainty about the future of workplace demand, several key indicators are now pointing toward stabilization — and in select markets, genuine recovery.

This report examines the major trends shaping the national office landscape, from leasing fundamentals and capital markets activity to the Federal Reserve's interest rate trajectory and its implications for office investors.

Leasing Fundamentals: Signs of a Floor

National office availability remains elevated by historical standards, but the rate of deterioration has slowed significantly. Gateway markets — particularly Manhattan, San Francisco, and Boston — are leading the recovery in leasing volume.

In Manhattan, availability rates reached their lowest level since 2020 in late 2025, driven by a wave of large-block lease signings from financial services, technology, and professional services tenants. BXP (formerly Boston Properties), one of the nation's largest office REITs, reported its strongest leasing quarter since 2019.

San Francisco's office market, which was among the hardest hit during the pandemic, has also shown improvement as AI companies have become aggressive office tenants. Firms seeking proximity to talent and the city's tech ecosystem are absorbing space that had been vacant for years.

Secondary markets tell a more mixed story. Sunbelt cities like Austin, Nashville, and Phoenix benefited from strong migration and corporate relocations but now face elevated supply from construction pipelines that were initiated during the post-pandemic boom. Suburban office markets nationally continue to underperform their urban counterparts.

Capital Markets: Thawing After the Freeze

Office investment sales activity — which fell dramatically in 2023 and 2024 as rising interest rates crushed valuations — showed signs of recovery through Q3 2025. National investment sales increased nearly 20% and loan originations jumped 48% compared to the prior year, according to industry reports.

However, the recovery has been uneven. Trophy and Class A assets in core markets have attracted buyer interest, while older Class B and C buildings face continued challenges. Several high-profile distressed sales in 2025 highlighted the bifurcation in the market:

• A major Chicago office complex traded at an 87% discount to its previous valuation
• Lenders have continued to extend and modify maturing office loans rather than force sales, creating a backlog of unresolved distress

The national average cap rate for office properties stood at 6.34% as of Q3 2025, with CRE interest rates at 6.57%. These levels remain significantly above the sub-4% cap rates that prevailed during the low-rate era, reflecting a repricing that most market participants view as permanent.

The Fed Factor: Rate Cuts on the Horizon?

The Federal Reserve's monetary policy trajectory may be the single most important variable for the office sector in 2026. After holding rates at elevated levels through much of 2025, the Fed has signaled a willingness to begin easing if inflation data continues to moderate.

For office landlords and investors, rate cuts would have several implications:

Positive: Lower borrowing costs would reduce debt service pressure on overleveraged properties, potentially averting forced sales. Refinancing conditions would improve for the $1.5 trillion in commercial real estate debt maturing over the next two years.

Positive: A lower rate environment typically increases the relative attractiveness of real estate as an asset class, potentially drawing capital back into office investments from fixed-income alternatives.

Cautious: Rate cuts alone will not solve structural challenges around remote work, sublease supply, or obsolescence in aging buildings. The recovery in office fundamentals is being driven by tenant demand, not financial engineering.

REIT Performance: Market Sending Mixed Signals

Publicly traded office REITs have delivered a wide range of outcomes. BXP and Vornado Realty Trust, both heavily concentrated in gateway markets, have seen stock price recoveries tied to improving leasing fundamentals. The broader Vanguard Real Estate ETF (VNQ) has benefited from strength in industrial, data center, and residential REITs, though office remains the weakest-performing property sector within the index.

SL Green Realty, Manhattan's largest office landlord, has been a bellwether for the New York market specifically. The company's leasing pipeline and occupancy trends have improved, though its stock still trades well below pre-pandemic levels.

Investors weighing office REIT exposure should consider the quality and location of the portfolio. The gap between well-positioned, Class A urban office and older suburban product has never been wider.

Sector Spotlight: AI and Life Sciences

Two tenant categories are driving outsized demand:

Artificial Intelligence: AI companies, from startups to established players, have been among the most active office tenants in markets like San Francisco, Manhattan, and Austin. Unlike many tech firms that downsized during 2022-2023, AI companies are expanding physical footprints to accommodate rapid headcount growth and collaborative work requirements.

Life Sciences: The life sciences sector continues to support office and lab demand in markets like Boston/Cambridge, San Diego, and the Research Triangle. While speculative lab development has moderated, demand from established pharmaceutical and biotech companies remains steady.

Outlook: Cautious Optimism

The national office market is not yet in full recovery, but the trajectory has improved meaningfully. Key indicators to watch in 2026:

• Leasing velocity: Will the improvement in gateway markets broaden to secondary cities?
• Sublease inventory: Sublease space remains elevated and is a drag on effective rents
• Debt maturities: How lenders and borrowers resolve the wave of maturing office loans will determine whether distress accelerates or remains manageable
• Return-to-office policies: Corporate mandates for in-office work continue to evolve, with most large employers now requiring 3-4 days per week
• Fed rate decisions: The timing and magnitude of rate cuts will influence investment activity and valuations

For investors, the office sector offers a classic contrarian opportunity — but selectivity is paramount. The winners in 2026 will be high-quality assets in supply-constrained markets with strong tenant demand. The losers will be commodity office space in oversupplied submarkets facing secular demand headwinds.