The U.S. office market posted its strongest leasing numbers since 2018 in the first quarter of 2026, a milestone that might suggest the sector has turned a corner. But a closer look at what is driving that activity reveals a more complicated picture, one shaped by constrained supply, changing tenant behavior, and demand forces that remain far from stable.
Rising interest rates, slower job growth, and uncertainty about remote work have kept the office sector under pressure for years. Even as leasing volumes climb, the underlying drivers raise questions about how durable this recovery is.
Phil Mobley, National Director of Office Analytics at CoStar Group, describes the rebound cautiously. “It is a recovery just by the definition of a return to a historical level of leasing activity,” he says, “but there are some key nuances.”
Shrinking Deal Sizes Signal Caution
Chief among those nuances is lease size. Average deal sizes are running roughly 15% below pre-pandemic levels. This gap reflects two converging pressures. Companies are still recalibrating their space needs based on workplace policy and attendance patterns. Meanwhile, a prolonged construction slowdown has left the market with little first-generation space, with prices at a premium.
That supply constraint is reshaping tenant decisions. Large occupiers approaching lease expirations are finding fewer upgrade options and are staying put. The absence of suitable alternatives means large blocks of space rarely open up, keeping deal sizes smaller across the board.
There is also a speculative element to the current leasing uptick. Venture-backed technology companies, particularly those focused on artificial intelligence, are taking space in anticipation of growth rather than in response to it. Combined with tenants locking in desirable space before it disappears, this behavior is inflating activity numbers in ways that may not reflect actual demand.
Mobley cautions the uptick may be self-limiting. As the remaining quality space is absorbed, there will be less available for tenants to chase, which could slow leasing activity regardless of underlying demand.
Landlords Pull Back on Concessions
On the supply side, landlord behavior has changed noticeably over the past 12 to 18 months. The era of escalating concessions, extended free-rent periods, and generous tenant improvement allowances appears to have peaked. There is a ceiling to what landlords can offer before a deal starts losing money. Beyond a certain point, concessions erode building value rather than support it.
For some owners, the constraint is more immediate. Capital-constrained landlords, particularly those approaching loan maturities, cannot fund meaningful tenant improvement work even at moderate levels. That limits their ability to compete for tenants who require buildout, effectively removing those buildings from the pool of viable options regardless of vacancy.
One adaptation that has gained significant traction over the past several years is the pre-built spec suite. Rather than waiting for a tenant to commit, landlords are finishing smaller units, typically 5,000 to 10,000 square feet, and marketing them as move-in ready. The bet is that shorter lease terms of three to seven years will allow enough renewal cycles to recover the upfront investment.
Desirability Drives Tenant Decisions
One persistent narrative in office market commentary is the idea of a flight to quality, the notion that tenants are simply trading up to trophy towers. Mobley pushes back on that framing. “It’s really about a flight to desirability,” he says, “and that desirability is going to be very nuanced, depending on the occupier.”
What tenants are moving away from is commodity space: buildings that offer nothing distinctive in terms of location, amenities, or accessibility. A well-located suburban building that is easy for the right workforce to reach can outperform a technically superior building in the wrong spot. Conversely, a Class A property that blends into the background without differentiation faces real headwinds.
Geographic divergence reinforces this point. Markets like New York and Dallas are recovering more quickly than Washington, D.C., or Chicago. Within the West Coast, San Francisco is recovering more quickly than Los Angeles. Even within the same city, the gap between sought-after and abandoned buildings continues to widen.
AI Could Suppress Office Demand
The most consequential long-term question facing the office sector is whether artificial intelligence will suppress the job growth that has historically driven demand for office space. Mobley frames this as a risk worth taking seriously, even without adopting a pessimistic outlook.
U.S. population growth is already slowing, and the labor force is no longer expanding at historical rates. AI-driven productivity gains could reduce the number of workers needed to run a business, compressing office-using employment even if the broader economy stays healthy. “You don’t have to have a terribly pessimistic view about AI to recognize that U.S. population growth is going to be a constraint to office-using job growth,” Mobley says.
The practical implication for investors is not necessarily that office demand collapses, but that it concentrates further. In a slow or no-growth employment environment, tenants become more selective about where they locate, and the gap between desirable and undesirable space widens. Anything that compresses job growth, Mobley argues, will accelerate the push toward the best available space and away from everything else.
Three Market Trends to Watch
Looking ahead to the remainder of 2026, Mobley is closely tracking three dynamics. The first is divergence, both between markets and between individual buildings, as the gap between winners and losers continues to grow. The second is demolitions and conversions. These are reducing the overall stock of office space as owners repurpose buildings for logistics facilities, multifamily housing, and hospitality uses. Still, they serve more as a lagging indicator of market stress than a signal of near-term improvement. Buildings removed from the office inventory were already uncompetitive, so their conversion does little to improve lease economics for the remaining stock.
The third, and most consequential factor, is the demand picture itself. The return-to-office movement has provided a meaningful lift but appears to be approaching a long-term equilibrium. Job growth is slow. Productivity gains from technology may further reduce headcount requirements. “All of that makes the demand story something that bears very close watching,” Mobley says.
Why Active Investors Have an Edge
The current environment offers an opportunity for investors willing to engage with its complexity, but it punishes passive approaches. Risk and reward are both elevated. Broad, index-style exposure is unlikely to generate strong returns. “I don’t think it’s going to be a very strong market for beta investors,” Mobley says.
Mobley expects firms capable of generating alpha by selecting the right assets in the right locations to perform well. The broad market, however, is unlikely to reward passive exposure. The recovery underway is real, but it is also narrow, driven by a specific set of tenants, a constrained supply environment, and behavioral patterns that may not persist. For office investors and owners, understanding what drives leasing numbers matters more than the headline figures alone. The next phase of this market will be defined not by whether activity holds up, but by where it concentrates and how quickly it pulls away from everything else.
About the Expert: Phil Mobley is the National Director of Office Analytics at CoStar Group, where he leads research on demand drivers, supply dynamics, and occupancy trends across the U.S. office market.
This article is based on information provided by the expert source cited above. It is intended for general informational purposes only and does not constitute legal, financial, or real estate advice. Readers should conduct their own research and consult qualified professionals before making any real estate or financial decisions.
