2026 Biannual Office Market Report: Part Two

The office market's recovery is real, but it is resting on a narrow base. Seven of ten gateway markets now rate as recovering in Class A, up from four a year ago, and AI tenants account for 51.1% of all TAMI leasing. Meanwhile, Class B/C has five markets in decline, and Prime Class A starting rents outside New York City and San Francisco sit below their Q4 2024 peak. Check out the full insights in the 2026 Biannual Office Market Report.

Construction Costs Near Record Highs While Office Spending Outside Data Centers Holds Near Its Dataset Low

The Producer Price Index for inputs to nonresidential construction climbed to 159.9 in July 2026, up 7.6% year over year and just below May 2026's peak of 160.8, on a January 2018 base of 100. Notably, private office construction spending excluding data centers moved the opposite way, falling 10.9% year over year to 96.6, below its January 2018 base and well under its August 2019 high of 150.3. Since January 2020, construction costs are up 53.6% while office spending excluding data centers is down 28.0%, a divergence that points to rising costs, among other demand factors, suppressing new conventional office supply. The picture looks different when data centers are included: total private office spending rose 21.8% year over year to an indexed value of 225.5, its highest reading in the dataset. Spending outside data centers has recovered from its January 2026 low of 89.3, though 2026 to date averages 94.1, the weakest year in the dataset.

Central Business District vs. Suburban Office Vacancy Gap Continues to Narrow as Both Sectors Show Signs of Easing

The gap between CBD and suburban office vacancy continued to narrow through the first half of 2026, falling to 4.5 percentage points in the second quarter from 5.9 percentage points in the fourth quarter of 2025. CBD vacancy eased to 23.0%, down 130 basis points from its first quarter 2025 peak of 24.3%, while suburban vacancy pulled back to 18.5% after climbing steadily since 2019 and touching 19.2% earlier this year. Both sectors now show early signs of stabilization rather than the broad-based increases that defined 2023 and 2024. However, CBD vacancy remains well above suburban levels, reflecting the lasting effects of hybrid work and tenant flight to quality. The narrowing gap suggests suburban markets are absorbing less of the pressure that had concentrated in CBDs, though neither sector has returned to pre-pandemic norms.

Prime Class A Rent Clears Triple Digits, but Growth Has Stalled Outside Two Markets

Compared to the fourth quarter of 2019, Prime Class A starting rents rose again in the second quarter of 2026, reaching $110.41 per square foot, up 75.0%. Excluding New York City and San Francisco, the same measure reached $68.04, up 32.3%, and now sits below its fourth quarter 2024 peak. The spread between the two widened from $8.74 in early 2019 to $42.37. Below Prime, segments are converging rather than diverging. The rest of Class A reached $60.45 and Class B/C reached $55.48, narrowing the spread between them from $12.02 a year earlier to $4.96. Notably, the Prime premium is concentrated in two markets. Excluding New York City and San Francisco, Prime Class A at $68.04 sits $7.59 above the rest of Class A, against a $42.37 gap for the full Prime average.

Seven of Ten Markets Now Recovering in Class A, While Half Decline in Class B/C

CompStak measured recovery using effective rents alone, combining change since 2019 with year-over-year change through Q2 2026. Class A carried the recovery. Seven of ten markets now rate as strongly or moderately recovering, up from four in Q2 2025, and the number still in decline narrowed from three to two. Chicago, New York City, and Phoenix hold strong recovery ratings. Washington, D.C., Atlanta, the San Francisco Bay Area, and Dallas-Fort Worth all moved up into the moderately recovering group, which quadrupled from a single market a year ago. Boston reversed hardest, falling from strong recovery to still in decline. Class B/C moved the opposite direction, with five markets in decline compared with three a year ago and only two rated in strong recovery, leaving Class A as the source of what recovery gateway markets have posted.

Renewal Lease Terms Have Closed Half the Gap on New Leases, While Legal Services Outpaces Other Industries

In the first quarter of 2019, tenants taking new space signed terms 24.5 months longer than tenants renewing. That gap has narrowed to 13.2 months, the tightest since 2019, and it closed from both directions. New lease terms drifted down to 89.6 months, 5% below their 2019 level, while renewals climbed to 76.4 months, 9% above 2019. Industry patterns diverge just as sharply. Legal services tenants have lengthened terms every year since 2020, reaching 114.3 months in 2026 through Q2, 23% above 2019. FIRE tenants recovered more modestly to 94.5 months. TAMI tenants’ lease term length remains the shortest at 79.2 months, only 6% above 2019 after bottoming in 2023, but up from 2025’s level. The spread between legal services and TAMI has widened from 18 months to 35. 

Check out the full insights in the 2026 Biannual Office Market Report.