The third quarter continued to show improvement in the nation’s much-maligned office sector, with strong leasing activity and vacancy rates beginning to move lower, according to the latest report from Cushman & Wakefield.

Office vacancy rates remained at 19.8% in the third quarter but declined 30 basis points year over year. Sublease availability has now dropped for 10 consecutive quarters and is below 89 million square feet for the first time since 2020. Leasing was relatively strong, with net absorption remaining positive for the fifth straight quarter.

Overall vacancy rates declined by 100 basis points year over year in about 25% of U.S. markets. San Francisco had the most dramatic vacancy drop of 410 bps, followed by Orange County, Calif., which fell 280 bps. New York City’s Midtown Manhattan posted a decline of 260 basis points, while the vacancy rate dipped by 240 bps in Midtown South Manhattan.

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The recovery has impacted markets of all sizes, with net absorption during the past four quarters exceeding 500,000 square feet in 15 U.S. markets, including eight with gains exceeding 1 million square feet.

Manhattan led the way in the third quarter, with net absorption of about 8.3 million square feet. It was followed by San Francisco (3.5 million square feet); Orange County, Calif. (2.7 million square feet); Dallas (2.4 million square feet); and San Jose, Calif. (2.3 million square feet).

While net office absorption during the past 12 months totaled more than 15.5 million square feet, net absorption in the third quarter measured an anemic 49,700 square feet. The low rate may be a worrisome sign for future growth in the office market, but Cushman & Wakefield remains optimistic, writing that the market “has clearly hit an inflection point, with momentum building and the demand fundamentals improving.”

A continuing trend has been the flight to quality, with Class A properties seeing vacancy rates fall 60 bps during the past 12 months as year-over-year rolling absorption exceeded 22 million square feet.

Average rents rose slightly during the quarter, reaching $38.65 per square foot, up $0.26 from the second quarter. Class A properties averaged $44.67 per square foot.

Midtown South Manhattan properties — the most expensive properties tracked by Cushman & Wakefield — fetched an average of $106.62 per square foot. Class A properties in San Francisco charged an average of $77.17 per square foot during the third quarter, while Miami’s top office sites averaged $74.77 per square foot.

Slow construction pipeline

One of the main reasons for the improving office market is the lack of new construction. Through three quarters this year, deliveries of new construction totaled only 7.1 million square feet, the lowest three-quarter total in more than 30 years, according to Cushman & Wakefield.

Deliveries since 2000 have averaged 12.2 million square feet per quarter, but no quarter in 2026 saw deliveries top 2.5 million square feet. Another factor is that some office space is being converted to residential units or repurposed for other uses.

But office construction may be about to improve. Currently, 23 million square feet of office space is under construction, and the pipeline is up 20% from its low of 19.1 million square feet in the first quarter of this year. Cushman & Wakefield reports that the last time the office construction pipeline fell below 23 million square feet was in 1997.