Office Demand on the Move.
Scarcity at the top of the office market is creating openings for the next tier, plus humanoid robots coming off assembly lines, senior housing occupancy topping 90%, and a haunted Utah ranch’s unlikely second act.
IN THE MARKET
Which buildings benefit when prime space runs out?
Demand spills into the next tier as prime vacancy tightens.
As the best office buildings fill, tenants are giving the next tier a closer look. Most markets still carry high overall vacancy numbers, yet are increasingly short of the space tenants want.
CBRE's second-quarter figures put national prime office vacancy at 12.3%, compared with 18.3% overall. In Midtown Manhattan, prime vacancy has fallen to 2.2%. For a tenant that needs a particular location or configuration, the shortfall on premium space is pushing demand toward the next tier.
THE TOP IS FILLING
As we've discussed in the past, replacement supply is not on the way for the office market. JLL recorded just 3.5 million square feet of office deliveries nationally in Q3, against 9.6 million removed from inventory. Tenants with upcoming requirements can't count on a new generation of premium buildings to widen their options.
THE NEXT TIER IS BENEFITING
CBRE analyzed the spillover effect and found that demand begins spilling into non-prime buildings in markets where prime vacancy reaches roughly 10%–12%. That level triggers a broadening recovery in the market, potentially signaling future demand for lower-tier options.
Manhattan offers more specific evidence of the spillover effect. Colliers reported that Class B availability declined for a fifth consecutive quarter in Q2, to 15.0%, while average Class B asking rents reached a record $70.58 per square foot. Overall availability, at 13.0%, is still above the roughly 10% Colliers considers equilibrium, so even Manhattan has not reached full landlord pricing power.
SCARCITY NEEDS A SUBSTITUTE
A building benefits from prime scarcity only if tenants consider it a credible alternative, which often makes the relevant competitive set narrower than a metro and even a submarket. Contiguous availability, transit access, building systems, finished suites and delivery timing determine whether a nearby property can capture an unmet requirement. Proactive landlords who have prepared their buildings and suites with turnkey options are starting to benefit.
Washington is another example showing early signs of a spillover. CBRE puts the District's trophy vacancy at 8.3%, and in the third quarter other Class A buildings absorbed 218,400 square feet as activity spilled over from the trophy tier. That happened in a market where federal leasing remains well below its historical average and JLL still classifies the recovery as early-stage.
TODAY’S OPPORTUNITIES & PITFALLS
While select office properties are still trading for shockingly low numbers in some locations, the fundamentals are recovering enough in many markets to warrant consideration. The most compelling opportunities today appear in second-tier buildings that tenants already treat as credible alternatives, in markets where prime vacancy is approaching the 10%–12% range. As prime options run out, improving economics after concessions and tenant improvements should follow in the buildings tenants accept as substitutes.
The challenge with office is always how capital intensive it can be. Despite the spillover, many buildings will remain on the sidelines due to obsolete systems or buildouts, and the need for heavy renovations or allowances that aren't feasible at today's rents.
ON OUR MINDS
i. Meet the New Workforce.
Back in July 2025, we asked how soon fully automated “dark factories” would show up in the U.S. and today, the robots are starting to come off assembly lines. Figure says its BotQ plant now builds one robot an hour, and Hyundai is planning capacity for 30,000 a year by 2028. Tesla started early production of Optimus this month on a Fremont line built for 20,000 units a week, with Musk (a notorious timeline optimist) expecting that rate to take at least a year. Of course, not everyone is convinced they'll be immediately transformative. But we're starting to question what happens if they do arrive at scale, and in particular how that will impact industrial site selection built around access to labor.
ii. The Senior (Housing) Moment.
Senior housing occupancy reached 90.4% in the third quarter, its 21st straight quarterly gain, with more than half of NIC's 31 primary markets now above 90% and Minneapolis among the tightest at 92.7%. Supply isn’t close to keeping pace. NIC estimates 100,000 new units a year would be needed to hold occupancy, against a current pace of about 10,000. Meanwhile, the oldest baby boomers turn 80 this year. Development planning is starting to pick up from today's low levels, but with current construction and financing costs, it could be a while before supply catches up to (continually growing) demand.
iii. The Haunted Asset.
In the spirit of Halloween, here’s the strangest repositioning story we’ve come across. In the mid-1990s, a family running cattle on a 512-acre ranch in Utah’s Uinta Basin, land long rumored to be cursed, began reporting lights emerging from circular “doorways” in midair and cows turning up mutilated. Eighteen months in, they sold it for around $200,000 to a Las Vegas billionaire who converted the ranch into a research station with an observation building, resident scientists and round-the-clock cameras. The property later drew investigators from a Pentagon UFO program. Today, “Skinwalker Ranch” is a trademarked brand and the set of a cable TV series. We’ll file this comp away for our next paranormal listing.
We remain grateful for your continued partnership and trust. If any of these topics hit close to home - whether it's a lease decision on the horizon, an acquisition or disposition question, or just a conversation about where the market is headed - we'd welcome the chance to think through it with you.
Want to discuss this with our team?
Contact Us →