The office recovery is real—but highly selective
For passive commercial real estate investors, the most important office-market development this week is not another forecast about whether remote work is permanent. It is the growing evidence that office demand is returning in certain markets, even as higher interest rates prevent a broad-based recovery.
Recent third-quarter data from Manhattan and Los Angeles point to stronger leasing activity, lower available supply, and improved tenant decision-making. At the same time, an Atlanta market discussion highlighted how higher borrowing costs are still making new office development difficult to justify.
That combination creates a more investable—but also more demanding—market. The question is no longer simply whether office is recovering. The better question is: which buildings, submarkets, and tenant profiles are participating in that recovery?
Manhattan is showing the clearest improvement
Manhattan’s office market recorded approximately 10.06 million square feet of leasing during the third quarter of 2026, according to Colliers data reported by Commercial Observer. That was above both the five-year and 10-year quarterly averages, although it was below the unusually strong second-quarter total.
The more significant signal may be supply. Available office space fell to approximately 64.76 million square feet, the lowest level since August 2020. Manhattan’s availability rate declined to 12.4%, marking the market’s tenth consecutive quarter of tightening availability.
Asking rents also moved higher. Average asking rent reached $85.08 per square foot in the third quarter, up from $78.03 per square foot in the second quarter.
The leasing mix matters. Large transactions included expansions and relocations by law firms, technology companies, media businesses, and professional-services tenants. Midtown South posted its strongest third-quarter leasing performance on record, helped by major deals involving Anthropic, Havas Health, and Snap.
For investors, these figures do not mean every Manhattan office building has recovered. They do suggest that tenants are willing to make meaningful commitments when a building offers the right combination of location, quality, amenities, transportation access, and available contiguous space.
That is a very different recovery dynamic from simply filling inexpensive vacant floors.
Los Angeles offers a second proof point—with more caveats
Los Angeles County also posted encouraging leasing data. Savills reported approximately 4 million square feet of office leasing in the third quarter, the market’s strongest quarterly result since 2019 and a 15% increase from the same period last year.
Availability declined to 26.5%, down 110 basis points from the second quarter and 170 basis points from a year earlier. Sublease availability fell to 6.3 million square feet, extending an eight-quarter decline.
However, Los Angeles also illustrates why passive investors should avoid treating headline leasing numbers as a complete market thesis. Renewals accounted for six of the region’s 10 largest third-quarter deals. That is positive for occupancy stability, but renewals do not necessarily represent expanding demand or stronger net absorption.
The recovery is also uneven by submarket. Century City, Beverly Hills, and El Segundo performed better, while areas including Miracle Mile, Burbank, and Culver City continued to report availability above 37%.
The takeaway is straightforward: a major metropolitan area can be improving while individual buildings remain under severe pressure. Market selection matters, but property-level selection may matter even more.
Higher rates are limiting the supply response
If leasing conditions are improving, why is the office recovery still so fragile? One answer is the cost of capital.
At an Atlanta State of the Market event, developers and industry participants described a much weaker outlook for new office construction after the Federal Reserve raised its benchmark rate by 25 basis points in September. Bisnow reported that participants questioned whether significant new development could currently meet required return thresholds.
This is important for existing high-quality assets. When new construction becomes uneconomic, well-located buildings face less near-term competition. Limited supply growth can support occupancy and rents in submarkets where demand is returning.
But the same rate environment creates problems for owners who need to refinance. Higher debt costs can offset improved property-level performance, especially when a building has substantial rollover, tenant-improvement requirements, leasing commissions, or capital needs.
The result is a two-speed office market:
- Best-in-class buildings may benefit from tenant flight to quality and limited new supply.
- Functional but undifferentiated buildings may need aggressive concessions to compete.
- Obsolete or poorly located assets may remain difficult to finance even when market leasing statistics improve.
- New development may be delayed, redesigned, or abandoned because the economics no longer support construction costs and required yields.
What passive investors should look for
Passive investors cannot control leasing decisions or refinancing markets, but they can be more selective about the risks embedded in a sponsor’s business plan.
1. Separate market recovery from asset recovery
A declining availability rate is encouraging, but it does not guarantee that a particular property will benefit. Review the building’s submarket, competitive set, floor plate efficiency, amenities, parking, transit access, and tenant retention history.
A property located in a recovering city but outside the strongest demand nodes may still require years of costly repositioning.
2. Study the lease rollover schedule
A building with high occupancy may still be vulnerable if several large tenants expire within the next two to four years. Investors should understand whether leases are being renewed, downsized, or expanded—and what rent concessions were required to secure those outcomes.
Renewal volume can stabilize cash flow, but it does not always create meaningful rent growth.
3. Stress-test refinancing assumptions
A property may look attractive under a base-case interest-rate forecast and fail under a more conservative scenario. Passive investors should examine the loan maturity date, interest-rate cap requirements, debt-service coverage, projected loan proceeds, and the sponsor’s plan if the refinance produces less leverage than expected.
The key question is not whether rates eventually decline. It is whether the property can reach maturity without depending on a favorable rate forecast.
4. Demand a realistic capital plan
Office recovery often requires spending. Common-area upgrades, HVAC work, elevators, lobby improvements, tenant amenities, and energy-efficiency projects can all affect competitiveness.
A sponsor that underbudgets capital expenditures may show stronger early distributions but face larger funding demands later. For passive investors, the quality of the reserve plan is often as important as the acquisition cap rate.
The investor takeaway
The latest office data provide a more constructive picture than the market experienced a year or two ago. Manhattan’s tightening availability and Los Angeles’ stronger leasing volume suggest that companies are still willing to commit to office space in the right locations and buildings.
But the recovery is not broad enough to support a blanket office allocation. Higher rates are still impairing development economics, refinancing remains a major risk, and weaker submarkets continue to show elevated availability.
For passive investors, the opportunity is likely to be concentrated in assets with durable tenant demand, constrained competition, manageable capital needs, and conservative debt structures. The office market may be turning a corner—but it is turning selectively.
