'Office' is actually having a scarcity problem

U.S. offices recorded a fifth straight quarter of positive net absorption, adding 6 million square feet in Q3, while signed leases averaged a 13% increase in footprint. Supply remains tight: 3.5 million square feet was delivered and 9.6 million removed in the quarter, leaving national inventory 45 million square feet below its level at end-2023. Effective rents for first-generation trophy space were up more than 20% year over year against Q3 2025, while second-generation rents rose 10% annually; construction is only about 9% of normal annual supply as equity capital remains scarce.

Analysis

The investable signal is not “office is back” so much as a widening gap between scarce, well-located space and buildings that remain difficult to lease or finance. Rent gains in trophy properties may lift asset values and refinancing prospects for owners of those assets, but they should not be extrapolated across office portfolios: tenant-improvement costs, concessions, and weak secondary locations can absorb headline rent growth. Shrinking inventory also benefits surviving buildings by removing competing stock, while making conversions and redevelopment economics more attractive for obsolete properties.

The constraint is capital, not just construction intent. If equity remains unwilling to fund new projects, existing prime landlords may capture near-term pricing power; developers and lenders remain exposed to long-duration execution and financing risk. Selective exposure to owners such as Boston Properties, SL Green, and Vornado is more defensible than a broad office-sector bet, subject to verifying each firm’s asset quality, leasing pipeline, debt maturities, and capital needs. This is a months-to-years thesis, not a clean near-term earnings catalyst. The contrarian risk is that leasing momentum reflects a narrow set of tenants and markets, while reported rent growth does not yet translate into durable cash flows. Reversal signals include slowing net absorption, renewed concessions, weaker office attendance or hiring, and refinancing stress; sustained leasing and cash NOI growth would strengthen the thesis.

Key Decisions for Investors

• Avoid a broad office REIT long on this evidence alone. Build a watchlist of trophy-heavy landlords, including Boston Properties, SL Green, and Vornado; verify building-level occupancy, signed lease commencements, tenant-improvement spending, and debt maturities before sizing exposure.
• For a 1–3 month catalyst window, monitor quarterly leasing and same-property cash NOI rather than asking rents. Add selectively only if occupancy and cash collections improve without a material rise in concessions or leasing costs.
• Treat new development as a delayed, conditional opportunity, not an immediate trade: monitor construction starts and equity commitments. If capital formation resumes while prime rents hold, developers may benefit; if financing remains unavailable, scarcity may support incumbents but not validate construction economics.
• Falsify the bullish thesis if absorption turns negative, concessions expand, or refinancing costs force asset sales; reassess if office attendance and hiring weaken in the tech-led markets driving demand.