Office Leasing Momentum Meets Rising Macroeconomic Headwinds
The post-pandemic recovery in the office market continues, but new macroeconomic pressures are beginning to cloud the outlook, according to JLL's latest office market dynamics report.
Leasing activity rose 7.6% year-over-year in Q1 and is up 3.7% over the past 12 months, approaching pre-pandemic levels in many markets. However, that momentum is increasingly running alongside weakening fundamentals in office-using employment sectors, raising questions about the durability of the recovery.
Employment across four key office-using industries declined by 97,000 over the past three months, even as total nonfarm payrolls increased modestly by 17,000. At the same time, job openings in those sectors rose by 34,000, suggesting some near-term hiring friction rather than full contraction. JLL noted the divergence between labor trends and leasing activity as a key risk factor for continued absorption gains.
Despite that backdrop, leasing fundamentals remained solid. Net absorption was positive for a third consecutive quarter at 3.5 million square feet, bringing total annual absorption to more than 16 million square feet. San Francisco and New York accounted for the majority of quarterly gains, underscoring the continued dominance of gateway markets in the recovery cycle.
Leasing activity has now reached 90% or more of pre-pandemic peaks in 25 of JLL's 52 tracked markets over the past year. While gateway markets continue to lead in momentum, secondary markets posted stronger quarterly growth in Q1, rising 2.2% sequentially, led by Nashville, Minneapolis and Denver.
Large-scale leasing has also rebounded. Since Q2 2025, 176 leases above 100,000 square feet have been signed, marking the strongest nine-month stretch for big-block deals since the pandemic began. Technology leasing is up 35% over the past year, reaching 84% of pre-pandemic levels, while finance, professional services and aerospace and defense have all surpassed pre-pandemic leasing volumes.
Total office inventory declined by nine million square feet in Q1 and has fallen more than 25 million square feet from its peak in late 2023. Construction activity remains near historic lows, with just 21 million square feet in the pipeline — the lowest level ever recorded in JLL's data.
Less than 1 million square feet broke the ground in Q1, signaling continued long-term supply pressure. The firm noted that development constraints, combined with high financing costs, are likely to extend supply shortages well into the next decade.
Inventory removals through conversions and redevelopment are also reshaping fundamentals. More than 10 million square feet was removed in Q1 alone, outpacing new completions by a wide margin. While this has contributed to near-term occupancy distortions, it is also tightening availability across core markets.
Overall vacancy declined modestly to 22.2%, while direct vacancy fell to 20.1%. Availability, however, has fallen more sharply — down more than 8% from peak levels.
Single-asset office sales reached $11.5 billion in Q1, up 40% year-over-year and the strongest first quarter since 2020. However, distress remains elevated, with delinquency rates rising to 11.41%.
Looking ahead, JLL warned that macroeconomic stagnation could limit further expansion. Office-using employment trends, rising interest rates and AI-related uncertainty are all shaping sentiment, even as structural supply constraints continue to tighten the market.
Source: GlobeSt/ALM