Office Construction Falls to 14-Year Low as Tenant Concessions Surge
Office construction has fallen to its lowest level in 14 years, even as leasing activity and occupancy trends show continued signs of stabilization, according to Newmark's 1Q26 U.S. Office Market Conditions & Trends report.
Only 17.2 million square feet of office space is currently under construction, reflecting a sustained pullback in development as the sector adjusts to hybrid work, elevated vacancy and shifting space requirements. Newmark expects just 13.6 million square feet of completions in 2026 — well below long-term averages — underscoring how sharply the development pipeline has contracted.
At the same time, demand indicators continue to improve. Net absorption totaled 4.5 million square feet in 1Q26, marking the third consecutive quarter of positive demand. Vacancy edged down to 20.2%, a modest improvement from its recent peak of 20.5% in mid-2025, while leasing volume rose 7.5% year-over-year, though it remains well below pre-pandemic norms.
Despite gains in leasing activity, landlords are still relying heavily on concessions to close deals rather than meaningful rent growth. Newmark reports that tenant improvement allowances in major gateway markets are now approximately 75% above pre-pandemic levels, underscoring how much of today's recovery is being subsidized through higher build-out costs rather than stronger rents.
While asking rents rose 2.6% year-over-year in Q1, real rents remain under pressure, even as nominal pricing appears stable.
Hybrid work continues to reshape how office space is used, limiting the extent of any demand rebound. Average office space per worker has declined 7.5% since 2020 and lease sizes are roughly 10.5% smaller than pre-pandemic levels.
Even so, Newmark notes that 76% of tenants plan to maintain or expand their footprints at lease expiration. Net absorption gains over the past three quarters reinforce that trend.
Also, leasing activity is increasingly concentrated in higher-quality assets. Four and five-star buildings accounted for more than half of the volume in Q1, reflecting continued flight-to-quality behavior across most markets.
Notably, office construction activity is heavily concentrated in Sunbelt metros such as Dallas, Miami and San Diego, which together account for more than half of all under-construction space. These markets will continue to see deliveries through 2028, raising the potential for localized supply pressure, the report said.
Elsewhere, the sharp pullback in new development is expected to limit future vacancy growth and gradually reshape market balance over time.
Source: GlobeSt/ALM