CoStar Projects Steady Decline in U.S. Office Vacancy

CoStar forecasts U.S. office vacancy will stay roughly steady through 2026 before a gradual decline. In Q2 2026, national office vacancy fell slightly to just under 14%, moving about 30 bps below the mid-2025 peak, signaling only modest improvement amid still-elevated vacancy levels.

Analysis

The near-term message is not “office is fixed,” it’s “the denominator stopped getting worse.” That matters because valuation in office-adjacent assets usually rerates on inflection, not on stability, and this forecast pushes any real earnings recovery for landlords, brokers, and CMBS spread compression into a longer window. For CSGP, the read-through is mixed: a stabilizing market can improve confidence in its data franchise and transaction-related products, but the company does not get a clean immediate demand pop unless leasing and sales volumes actually reaccelerate.

Second-order, the biggest beneficiaries of a flat vacancy curve are not office REITs but the lenders and owners who need time to work out maturities. Lower volatility in the office data may reduce tail-risk pricing in bank CRE reserves and BDC/watchlist exposures over the next 1-3 quarters, but it does little to solve the structural reset in rents and cap rates. If the market starts pricing this as a cyclical bottom, that is probably too early; a gradual decline starting after 2026 is too slow to justify a broad multiple expansion now.

Contrarian view: the consensus may be underestimating how much of the “improvement” is just lease expirations rolling through the system rather than genuine demand growth. If labor flexibility and hybrid work persist, vacancy can plateau for a long time while effective rents and property NOI still deteriorate, which is bearish for office-heavy balance sheets even if headline vacancy looks better. The thesis is falsified if leasing spreads and net absorption inflect materially positive over the next 2-3 quarters, not just if vacancy stops rising.

Key Decisions for Investors

• Maintain a cautious/underweight stance on office-exposed REITs and CRE credit proxies for the next 1-3 quarters; the forecast supports stability, not a cash-flow recovery. Falsify if leasing spreads and net absorption turn meaningfully positive by the next earnings season.
• Use any post-print strength in CSGP to trim rather than add; the market may overread a stabilization narrative before revenue acceleration is visible. Best risk/reward is on pullbacks after management commentary, not into the headline.
• Pair idea: long quality data/marketplace names with resilient recurring revenue, short office balance-sheet risk proxies in the CRE complex. The trade works if office distress remains contained-but-persistent and CMBS/CRE spreads stay wide over the next 3-6 months.
• Watch bank CRE reserve disclosures and CMBS delinquency trends as the real catalyst set, not vacancy headlines. If those metrics stop worsening for 2 consecutive quarters, reduce any bearish CRE positioning.