Market Forecast 2026 Mid-Year Office
Outlook

THE OFFICE MARKET IS GAINING STABILITY AS DEMAND STRENGTHENS

The office market continues to stabilize as leasing activity improves and supply pressures ease.

Leasing activity has strengthened as companies gain greater clarity around workplace strategies, long-term space needs, and the role of hybrid work within their organizations. At the same time, increased investment in artificial intelligence is beginning to support demand for high-quality office environments that foster collaboration, innovation, and talent attraction.

Although vacancy remains elevated in many markets, tenant demand, leasing activity and overall market optimism continues to gain velocity. Limited new construction and the continued conversion or removal of obsolete office buildings are helping reduce excess supply, and create a more balanced environment in many markets.

THE FLIGHT TO QUALITY REMAINS ONE OF THE DEFINING TRENDS IN THE OFFICE MARKET

Companies continue to gravitate toward newer, well-located properties that offer modern amenities, support collaboration, and help attract and retain talent.

As office attendance gradually increases and organizations place greater emphasis on employee experience, demand has become increasingly concentrated among premium assets.

With new development near historic lows, competition for the highest-quality space has intensified, while upgraded and repositioned properties are beginning to benefit as tenants seek attractive alternatives in markets where premier space is becoming more limited.

The Flight to Quality Drives Performance

 

SHIFTS IN VACANCY & SUBLEASE SPACE

Occupancy is beginning to improve as leasing activity strengthens and sublease availability declines.

Technology-focused markets and major gateway cities have led this progress, supported by larger lease transactions, increased tenant demand, and the continued absorption of sublease space. Although vacancy remains above pre-pandemic levels, positive net absorption and declining sublease inventories across many markets suggest conditions are gradually improving.

The Western U.S. sublease rate, as a percent of total available space, has fallen from a peak of 15.3% in 2023 to 9.0% by mid-year 2026. While still above the pre-pandemic average of 4.7%, the continued decline is an encouraging sign that the market has reached a turning point and is moving toward recovery.

Sublease Space Continues to Decline

 

Vacancy Rate by Market

 

Investment Market Activity

 

OFFICE OUTLOOK: RECOVERY TAKES HOLD

The office sector remains positioned for steady improvement rather than a rapid rebound.

Demand is expected to benefit from more stable economic conditions, continued job growth across office-using industries, and greater certainty around long-term workplace strategies. Premium buildings are likely to remain the strongest performers, while older properties may continue to face pressure to invest, reposition, or explore alternative uses.

Combined with limited new supply, these trends should support higher occupancy and a healthier balance between supply and demand over time. Although challenges remain, particularly for lower-quality assets, the outlook for the office sector is becoming increasingly positive and optimistic.

Western U.S. Forecast

 

 

Frequently Asked Questions

What is the current sublease vacancy rate in the Western U.S. office market?

The Western U.S. sublease rate stood at 9.0% of total available space by mid-year 2026, according to Kidder Mathews research. This is down significantly from a peak of 15.3% in 2023. Despite the improvement, it remains above the pre-pandemic (2010-2019) average of 4.7%. (Data source: CoStar, Kidder Mathews Research)

Is the Western U.S. office market recovering in 2026?

Yes, the office market is gaining stability as demand strengthens, according to Kidder Mathews research. Leasing activity has improved and, although vacancy remains elevated in many markets, tenant demand, leasing activity and overall market optimism continues to gain velocity. Limited new construction and the continued conversion or removal of obsolete office buildings are helping reduce excess supply and create a more balanced environment in many markets.

What is driving office leasing demand in 2026?

Demand is being driven by companies gaining greater clarity around workplace strategies, long-term space needs, and the role of hybrid work within their organizations, according to Kidder Mathews research. At the same time, increased investment in artificial intelligence is beginning to support demand for high-quality office environments that foster collaboration, innovation, and talent attraction.

Is flight to quality still shaping the office leasing market?

Yes, flight to quality remains one of the defining trends in the office market, according to Kidder Mathews research. As office attendance gradually increases and companies place greater emphasis on employee experience, demand has become increasingly concentrated among premium, newer, well-located assets. With new development near historic lows, competition for the highest-quality space has intensified, while upgraded and repositioned properties are beginning to benefit as tenants seek alternatives where premier space is limited.

What is the average price per square foot for Western U.S. office sales?

The average sale price for Western U.S. office properties was $270 per square foot on a four-quarter rolling average basis as of second-quarter 2026, according to Kidder Mathews research. (Data source: CoStar, Real Capital Analytics)

How much has office sublease space declined since its pandemic-era peak?

Sublease space, as a percentage of total available space, has declined from a peak of 15.3% in 2023 to 9.0% by mid-year 2026, according to Kidder Mathews research. This continued decline is described as an encouraging sign that the market has reached a turning point and is moving toward recovery, even though the rate remains above the pre-pandemic average of 4.7%. (Data source: CoStar, Kidder Mathews Research)

Which office markets are leading the recovery in leasing activity?

Technology-focused markets and major gateway cities have led the progress in occupancy improvement, according to Kidder Mathews research. This has been supported by larger lease transactions, increased tenant demand, and the continued absorption of sublease space across many Western U.S. markets.

Are older office buildings underperforming compared to newer properties?

Yes, premium and newer buildings are outperforming older office properties, according to Kidder Mathews research. Older assets may continue to face pressure to invest in upgrades, reposition, or explore alternative uses, while premium buildings are likely to remain the strongest performers as flight-to-quality dynamics persist.

What is the outlook for new office construction in the Western U.S.?

New office development is near historic lows across the Western U.S., according to Kidder Mathews research. Limited new supply, combined with improving demand, is expected to support higher occupancy and a healthier balance between supply and demand over time, though the recovery is expected to be steady rather than a rapid rebound.

 

 

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Contact GARY BARAGONA Vice President, Research gary.baragona@kidder.com 415.229.8925

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