Office Demand Surges with Higher Absorption, Increasing Sales
The market is seeing improving fundamentals as recovery from the pandemic continues.
Strong fundamentals, including surging net absorption, rising rents and increasing investment sales, are all signs that the U.S. office market may be “on the cusp of a new phase in the recovery market,” according to a new JLL report.
“There are a lot of reasons to be pleased about the direction the market is going,” Bruce Miller, JLL senior managing director and office group leader, told Commercial Property Executive. “In a lot of ways we’re approaching where we were pre-pandemic. And in some areas, we’re actually well beyond where we were pre-pandemic, certainly rental rates and some other factors that we track.”
Miller said office fundamentals began improving in the second half of 2024 and have continued to accelerate, particularly for Tier 1 and Tier 2 assets.
“We’re pretty excited about that after a tough couple of years,” he said.
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Miller said JLL’s latest Office Chronicle semi-annual capital markets report shows demand is surging, with the second quarter of 2026 recording 11.2 million square feet of positive net absorption. It’s the highest quarterly total since 2019, which saw 13.1 million square feet of positive net absorption, and marks four consecutive quarters of gains after years of contraction. JLL reported that the market recorded 30 million square feet of absorption over the past four quarters.
“We’re seeing positive net absorption in the vast majority of markets right now,” Miller said, noting that they started seeing most markets turning positive around the fourth quarter of 2025.
The JLL report noted that just three years ago the same dataset tracked by JLL recorded 17 million square feet of negative net absorption.
Gross leasing activity has grown to within 12 percent of the pre-pandemic average levels and subleasing activity is down 40 percent from 2023 peak levels.
AI is driving demand in markets across the country, Miller noted. He said there has been about 25 million square feet of AI-related leasing over the last three years between San Francisco and the Silicon Valley. Other markets are seeing an impact as well, such as Seattle and Bellevue, Wash., which recorded 1.9 million square feet and 1.7 million square feet respectively, Dallas with 6.1 million square feet, Austin, Texas, with 3.7 million square feet, Boston with 3.6 million square feet, and the Washington, D.C., metro area with 5.3 million square feet.
“Even Manhattan has seen close to 7 million square feet (of AI-related leasing) and others so we’re definitely seeing that being a demand driver,” Miller said.
Supply scarcity impacts fundamentals
Less than 5 million square feet of new office space will deliver across the nation next year, according to JLL, the lowest in three decades. Meanwhile, roughly 160 million square feet has been removed from inventory since 2020. Miller said that historically the average annual number of deliveries had been about 40 million square feet. There’s also been movement by tenants from Tier 3 and 4 buildings to Tier 1 and 2 properties.
Miller added that an increasing number of office conversions to residential and other uses, as well as teardowns, have contributed to the lower supply leading to higher rents and occupancy in some markets and submarkets.
The report stated that Tier 1 rents are 43 percent higher on average compared to the period between 2015 and 2019, with occupancy at an all-time high of 85 percent.
“In many submarkets we’re actually seeing rent spikes,” Miller said. “We define a rent spike as maybe 5 percent rental growth or higher year over year. The South End submarket in Charlotte has experienced 40 percent plus rental growth year over year for the last six or seven quarters.”
Investment sales, deal flow increasing
Investment sales are picking up “substantially” as institutional money comes off the sidelines, the report noted. Office investment jumped 21 percent year over year to $32 billion in the first half of 2026. Debt originations rose 43 percent year over year in the first half of 2026, signaling institutional investors were moving from “office curious” to “office serious.”
Deal flow is increasing and bid pools are healthy as the bid/ask gap has narrowed in most transactions. JLL noted Tier 1 and Tier 2 quality assets are receiving quotes as high as SOFR + 200 from a wide range of debt funds, CMBS, life insurance companies and select money center banks.
“We are seeing an increase both in the number of loans made and certainly in the number of institutions that are quoting office loans taking place,” Miller said.
Most of the investor interest has been coming from private equity and hedge funds rather than traditional core funds, many of which have shifted investments from office to industrial in recent years. That’s resulted in a trend of shorter-hold periods, generally between three and five years versus the 10-year holds traditionally seen by core fund investors.
“That’s the reason why the investors are skewing a little bit more toward the value add and opportunistic end of the spectrum,” Miller noted. “Those investors tend to be almost by definition shorter-term holders of real estate.”
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