Why Supply, Not Demand, Is Driving the Office Market Recovery

Four consecutive quarters of rising office occupancy. Vacancy down 30 basis points since its mid-2025 peak. On the surface, the latest CoStar office forecast reads like a market finally finding its footing. Look at what is actually moving those numbers, though, and the story changes. This isn't tenants coming back in force. It's the supply side finally getting purged of buildings that never should have been competing for tenants in the first place.

Same Direction, a Different Engine

Net absorption, the actual change in occupied space, is projected at roughly 13 million square feet for 2026 and just 5 million in 2027. Both figures are below the prior forecast, a downward revision tied to soft first-half performance and a weaker employment growth outlook. On the supply side, new construction is expected to be essentially flat in 2026 and to contract by 8 million square feet in 2027, as delayed completions and a rising pace of demolitions work through the pipeline. Put those two numbers side by side, and the message is straightforward: Demand is not accelerating. What's changing is how much space is left standing to absorb it.

Return to Office Is a Utilization Story, not a Hiring Story

The mandates get the headlines. Amazon, JPMorgan Chase and Goldman Sachs have all pushed employees back to five-day office weeks over the past 18 months, and by some counts more than half of Fortune 100 companies now require full-time in-office attendance, up from roughly one in 10 a few years ago. Microsoft's approach, a phased rollout requiring three days a week for employees within 50 miles of an office starting in February 2026, is closer to where most large employers are actually landing: tighter hybrid rules rather than a wholesale return to 2019.

What matters for the real estate market is what these mandates are and are not doing. Companies are filling more of the space they already have. They are not, in aggregate, hiring more people to fill it. That distinction is showing up directly in the numbers: Tenants are absorbing more square footage per worker, not adding headcount at a pace that would meaningfully move demand. It's worth holding onto some skepticism about how far this trend goes, too. Roughly two-thirds of companies still preserve some form of hybrid flexibility, and the productivity case for strict in-office mandates remains genuinely contested in the research. The safer bet is that enforcement gets stricter from here, not that the five-day standard becomes universal.

Flight to Quality Is Doing the Real Work

Here's the part that matters more for how this plays out building by building. The return-to-office wave isn't landing evenly across the market. It's concentrated in trophy and top-tier space, the buildings with the amenities, the transit access, and the address that make a mandate feel like something other than a punishment. That's the small pool of competitive space behind the improving rent outlook: Landlords of the best buildings have real leverage right now, even with headline vacancy still elevated, because there simply isn't much comparable space to compete with them.

Everything below that tier is a different story. Class B and C buildings, the ones RTO mandates tend to skip entirely, are the properties now being pulled out of the market altogether. Not through leasing. Through demolition and conversion.

The Supply Side Is Disappearing, Building by Building

Two trends are doing more to move the vacancy number than any amount of new leasing. Developers are demolishing obsolete office buildings and replacing them with industrial product. Foundry Commercial closed its 10th office-to-industrial redevelopment earlier this year, part of a strategy that has already removed 2.6 million square feet of office space nationally, and the same pattern is showing up around Dallas-Fort Worth, Phoenix and Orange County, where aging Class C towers are giving way to logistics and advanced manufacturing space close to population centers. On the residential side, a 2026 RentCafe report counted 90,300 apartment units now in the office-to-apartment conversion pipeline nationally, up 28% year over year and nearly four times the 2022 total, with the New York metro alone accounting for more than 16,000 of those units.

None of that activity shows up as a leasing transaction. But every demolished or converted square foot comes out of the vacancy denominator permanently, which is exactly why supply contraction, not demand growth, is the real driver of improving numbers through the rest of the decade.

The Risk Sitting Underneath the Forecast

The forcing mechanism behind a lot of these demolition and conversion decisions is financial, not strategic. More than $200 billion in office loans mature in 2026, and many of the buildings behind them have lost enough value that refinancing doesn't work, leaving demolition or conversion as the path that actually pencils out.

That's a durable trend. The bigger risk to the forecast sits on the demand side: If the productivity gains behind flat headcount growth continue or accelerate, it could mean further hiring stagnation or layoffs even without a recession, which would blunt the benefit of a shrinking supply. There is an offsetting upside: Companies could keep taking on more space per worker rather than pulling back, but that pattern has no real precedent over a sustained period, which is why the downside case carries more weight.

What This Means for Tenants

For companies sitting in trophy or top-tier buildings, this is a narrow window. Landlord leverage is building but hasn't fully arrived. Locking in renewal terms now, before the best buildings fill up further, is worth the effort it takes to move early.

For companies in Class B or C space, the read is different and more urgent. The building your team occupies today may not exist, or may not be office space, three years from now. That changes how a lease renewal should be evaluated: not just on rent and term, but on whether the asset itself is a demolition or conversion candidate. Waiting until the final renewal window to find that out is the wrong way to learn the answer.

This is exactly the kind of decision that benefits from a perspective with no stake in either outcome. A tenant-only advisor can walk through both scenarios, what happens if you stay and what happens if the building doesn't, without a landlord relationship shaping the recommendation. In a market where buildings are disappearing faster than tenants are growing into them, that read is worth having well before a renewal deadline forces the question.