Since the pandemic, much of the narrative around the U.S. office sector has focused on corporate downsizing driven by the transition to remote work. However, those headwinds appear to be subsiding as hybrid work, with a mix of in-office and remote days, has become the norm.
U.S. office demand has demonstrated a renewed momentum in recent quarters as its recovery broadens across markets and industries. Cushman & Wakefield’s Q2 2026 U.S. Office MarketBeat highlights how conditions are rebalancing, with net absorption rising for seven consecutive quarters and sublease inventory falling 28% from its cyclical peak.
Although economic uncertainties persist and employment growth in office-using industries has moderated, office fundamentals continued to improve throughout the first half of 2026.
Tenants Are Active & Office Demand is Rebounding
Strengthening office market conditions are widespread across geographies. In fact, 60% of U.S. markets recorded positive net absorption over the past four quarters, including 16 markets where occupancy gains exceeded 500,000 sq ft. Gateway markets such as Midtown Manhattan, Midtown South Manhattan, and San Francisco, alongside high-growth Sunbelt markets including Dallas, Phoenix, and Charlotte, have led the way. Nationally, net absorption totaled 14.3m sq ft over the past four quarters, marking the highest annualized absorption reading since 2020 as tenant demand expanded nationwide.
A similar trend has emerged in vacancy rates. Over half of U.S. markets posted quarterly and annual vacancy declines in Q2, with gateway and gateway-adjacent markets such as San Francisco, Orange County, and Midtown Manhattan recording the sharpest year-over-year decreases. These vacancy improvements have been supported by the continued reduction of available sublease inventories, which have fallen over the past year in two-thirds of U.S. markets.
Specific Sectors Lead the Way
Key sectors such as artificial intelligence (AI), legal, and financial services have been particularly strong drivers of this growing demand. AI has emerged as a demand catalyst for numerous commercial asset types, from data centers to industrial & logistics buildings, and AI firms have increasingly inked deals for office space as well, especially in specific AI-leading markets. Nearly half of the world’s top 25 markets for AI/Machine Learning (ML) company concentration are in the U.S., with the Bay Area and New York City serving as the industry’s dominant hubs.
In San Francisco, AI & ML firms leased 2.9m sq ft through the first two quarters of 2026, representing 38% of the market’s total office leasing volume and surpassing 2025’s full-year activity by nearly 40%. Firms leased an additional 3.3m sq ft of office and R&D space in Silicon Valley and 817,000 sq ft of office space in San Mateo County, bringing the sector’s first half activity in the Bay Area to over 7.0m sq ft.
AI leasing demand has similarly grown in New York City. Through the first half of the year, AI firms leased nearly 1.7m sq ft of office space, already 66% above 2025’s full-year total. While the sector is still in its early stages of expansion in the market, AI firms are capturing an increasingly significant share of technology leasing.
Compared to many other industries, law firm leasing rebounded more quickly following the pandemic and has remained exceptionally robust, with firms posting record leasing volumes for the sector in each of the past four years. Beyond maintaining their existing occupancies, law firms have often expanded their footprints, reinforcing their role as one of the most office-centric sectors.
Financial services firms have historically been among the largest drivers of office demand and have recently seen an acceleration in leasing activity. For example, in Dallas, financial services companies leased 728,000 sf of space through the first half of 2026, accounting for 10% of total leasing volume. That exceeds the 7% share of leasing activity that financial services firms comprised in 2019, underscoring the sector’s impact on current market demand.
Quality is Paramount
In today’s hybrid work environment, tenants are prioritizing workplace quality and amenity offerings to encourage greater office attendance and employee engagement. Tenant demand has gravitated towards premium Class A assets as occupiers use their office spaces as a performance lever. As a result, Class A vacancy dropped by 50 basis points (bps) over the past year, outpacing the rest of the office market.
In addition, Class A net absorption totaled nearly 24.5m sq ft over the past year, exceeding the overall market’s net absorption by 71%, highlighting the outsized role that the highest-quality buildings play in driving the market’s recovery.
Trophy assets have outperformed to an even greater extent, even in markets where overall vacancy remains elevated. In the Chicago CBD, trophy assets have vacancy rates that track nearly 1,000 bps below Class A buildings and almost 1,400 bps below the overall CBD vacancy rate. A similar dynamic is seen in Washington DC, where trophy vacancy is more than 800 bps below the Class A vacancy average.
The Office Market is Transforming to Meet the Moment
At the same time that demand has accelerated, construction activity has also continued to moderate. Over the past four quarters, just 15.6m sq ft of office space was completed, representing a 24% annual decline and the lowest delivery volume in 14 years. New supply is expected to remain limited in the near term, as the current construction pipeline currently stands at 19.7m sq ft, 30% below its long-term norm.
Beyond the slowdown in development, the office market was also undergoing a contraction of existing inventory. An uptick in conversions, repositions, and demolitions has removed 33m sq ft of space from the market over the past five quarters. This reduction of less competitive assets, particularly in urban submarkets, is expected to better align the office supply with tenants’ evolving preferences.
The office sector has adapted to changing market conditions before, and as the physical office becomes increasingly embedded in employee engagement and corporate performance strategies, demand opportunities will continue to emerge.
