Office Market Splits as Prime Space Pulls Further Ahead

The office market is recovering, according to Commercial Observer, which reported that national demand and investment activity are improving after years of weakness. CBRE recorded 12.6M SF of net absorption in Q2 2026, nearly twice the prior quarter and the ninth consecutive quarter of positive demand. Leasing activity also rose 16% year over year.

The improvement is showing up across several measures. CBRE said overall office vacancy declined 30 basis points to 18.3% in Q2, the largest quarterly drop since 2015. Asking rents are growing at their fastest pace in six years, while office investment volume is forecast to increase 16% in 2026.

Prime Office Pulls Away

The headline recovery masks a much wider divide inside the office market. Prime vacancy sits at 12.3%, compared with 18.3% across the broader market, according to CBRE’s Q2 2026 data. That 600-basis-point difference suggests investors should be cautious about treating national vacancy as a single indicator of asset performance.

The divergence is even more pronounced in individual markets. Commercial Observer pointed to Midtown Manhattan, where prime office vacancy is just 2.2%. That stands in stark contrast to weaker suburban properties, where older buildings can struggle to attract tenants and financing.

The market has already embraced the flight-to-quality thesis. Investors increasingly favor newer, better-located buildings with stronger amenities and more functional layouts. But physical characteristics may not tell the entire story.

The Details

The performance gap can exist even among buildings with broadly similar physical characteristics, according to workplace research from Leesman. Its analysis of 1,322 workplaces and 476,341 employee responses found a major difference in workplace experience based on how space is configured and used.

Among workplaces with unassigned seating, those offering genuine workspace variety scored an average 79 on the Leesman Index, while those without that variety averaged 51.1. That creates a 27.9-point difference without necessarily changing the underlying building shell.

Leesman’s broader findings reinforce the point. Sixty-five percent of workplaces with strong workspace variety reached its top experience band, compared with just 17% of workplaces without it. The implication is that management, programming and configuration can materially affect how tenants experience an office.

Operations Become the New Differentiator

The office market’s quality divide is increasingly about more than location, vintage or amenities. Commercial Observer’s analysis argues that operational execution can create meaningful performance differences within the same broad asset tier.

That matters because physical quality is relatively easy for investors to identify and price. A strong location, modern construction and attractive amenity package are visible during due diligence and reflected in acquisition underwriting. Operating quality is harder to measure. It can emerge later through tenant renewals, expansions and decisions about whether a company stays in the building.

Leesman’s research also shows that occupiers are still figuring out how offices should function. In a poll of 129 senior corporate real estate leaders conducted in late 2025, 65% said their organizations had not yet found the right approach to hybrid work and office attendance. Another 57% said their footprint had shrunk over the previous 18 months, while 48% expected additional reductions.

Why It Matters

The office market’s recovery makes the distinction between asset selection and asset improvement more important. Prime properties are already benefiting from stronger demand, tighter vacancy and the industry’s broad flight-to-quality consensus. That can make them safer bets, but it also means investors are competing for assets where the quality premium is increasingly understood.

The more interesting question is whether investors can improve buildings that currently sit on the weaker side of the divide. If operational execution contributes meaningfully to tenant experience, owners may have another lever beyond buying newer or better-located properties.

What’s Next

The next phase of the office recovery will likely sharpen the separation between buildings that attract tenants and those that continue to struggle. Commercial Observer’s analysis suggests that low supply will make that sorting process more consequential, particularly as occupiers remain uncertain about how much space they need and how offices should support hybrid work.