After years of rising vacancy, the U.S. office market may have turned a corner. A consistent stabilization of demand over the past two years has driven the first decline in vacancy since early 2019, signaling a new cycle of recovery, according to JLL’s office market dynamics report.
National office vacancy fell 5 basis points to 22.5% at the end of the third quarter. With minimal new development and corporate footprints beginning to expand, JLL projects an extended period of declining vacancy ahead.
Net absorption surged to 6.1 million square feet in the third quarter—more than double the previous post-pandemic high recorded in late 2021. Year-to-date absorption remains at -3.7 million square feet, largely due to space removals for conversions and redevelopment, as well as federal lease terminations earlier this year.
Despite isolated proposals for high-end trophy projects in major gateway markets, overall development activity continues to contract. High vacancy rates, discounted property sales, and new city-level incentives have spurred a record pace of office conversions, with more than 25 million square feet of office inventory removed so far this year.
The construction pipeline now totals less than 6 million square feet—down sharply from more than 50 million in 2019. This “aggressive correction” is making it harder and more expensive for occupiers to secure high-quality space, the report said. Class A properties built within the past 25 years have led the tightening trend, with vacancy in this segment declining by 104 basis points over the past year. Availability in new supply has fallen for more than two years, while buildings constructed between 2010 and 2014 have been tightening since early 2024.
On average, major markets now have less than 500,000 square feet of office space under construction, as the active development pipeline fell another 20% in the third quarter. JLL expects net negative inventory to persist for at least the next two years as conversions continue and new projects remain limited.
Large leasing transactions helped drive renewed demand after a mid-year slowdown. Gross leasing volume grew 6.5% quarter-over-quarter to 52.4 million square feet. Leases over 100,000 square feet, which had dropped more than 40% in the second quarter, rebounded by over 50% in the third quarter, signaling a return to the recovery trend.
Eighteen markets have now surpassed pre-pandemic leasing activity, and seven additional markets have recovered to more than 90% of those levels, JLL reported. Gateway markets such as Silicon Valley, San Francisco, and Chicago led the momentum, with annual leasing growth of 58%, 34%, and 28%, respectively.
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