'Office' is actually having a scarcity problem

Crowds walk through midtown Manhattan on October 16, 2025 in New York City.

Spencer Platt | Getty Images News | Getty Images

A version of this article first appeared in the CNBC Property Play newsletter with Diana Olick. Property Play covers new and evolving opportunities for the real estate investor, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large public companies. Sign up to receive future editions, straight to your inbox.

Barely a few years after what some saw as a pandemic-driven collapse of the U.S. office market, the sector is roaring back to health at an unexpectedly fast clip. That speedy recovery is resulting in a shortage, especially of premium space.

The office market posted its fifth consecutive quarter of positive net absorption, with occupiers adding 6 million square feet in the third quarter of this year, according to a new report from JLL. And employers are expanding, with signed leases now averaging a 13% increase in footprint. Just two years ago, the main theme in office was downsizing.

This all comes at a time when supply is falling — and falling faster than demand is recovering. Just 3.5 million square feet of new office space was delivered in the third quarter, which matches the near-record low supply seen in the second quarter. At the same time, 9.6 million square feet was removed through either conversions or redevelopments. The inventory of office space nationally has lost 45 million square feet since the end of 2023. 

There is currently just 23 million square feet of new office space under construction, and with demand for premium office surging, this new space is becoming increasingly scarce. JLL deems it a "flight to scarcity." As a result, rents are finally rising.

Effective rents for first-generation trophy space are now up more than 20% compared with the third quarter of 2025. The lack of available trophy space is now pushing more occupiers to second-generation space. In turn, rents for that sector are up 10% annually. 

"Office, which is having a real renaissance right now … If you own, if you bought that 18, 24 months ago, you've done incredibly well in office in San Francisco and New York," said Willy Walker, CEO of Walker & Dunlop, a commercial real estate finance and advisory firm, on CNBC's "Closing Bell Overtime."

There are, as always, stronger local drivers to different metropolitan markets. Tech is leading the way with the highest net absorption in San Francisco and Austin. Sun Belt markets have also seen strong demand, with gateway area leasing volume up 13% from a year ago. Smaller, tertiary markets have come back to roughly 95% of their 2019 leasing volume. 

With supply shrinking and demand rising, construction should be picking up, but it's not.

"Now is the perfect time to be putting a shovel in the ground, except no one's going to do it," said Walker, noting that this year office construction is at about 9% of its normal annual supply. "It's a perfect time to start projects to be delivered in the next two or three years. The problem with it is back to equity capital. You're not finding the equity capital going towards it right now, and as a result of it, we will be in a supply-constrained market, which, what will that do? It'll push rents up."

Get Property Play directly to your inbox