Callahan Capital Partners - Office Real Estate Digest

Here's a glimpse into what we are reading to shape our view on the evolving office market.

Office tenants signed an estimated 120 million square feet of new leases in Q1 2026 … the strongest quarter since mid-2018, up 25% year over year and the first time this decade that quarterly volume has exceeded its pre-pandemic average. But the more important signal is in the composition: per CoStar analytics, the record was driven by an exceptionally high transaction count, not a handful of outsized deals. Nearly half of the 20 largest U.S. office markets have now recovered to within 10% of their pre-pandemic leasing averages. Charlotte and New York lead the way, supported by financial institutions that never meaningfully retreated from the office and, increasingly, by AI-sector tenants adding a new layer of diversified demand. Read more here.

CBRE's 2026 Tech Gateway Office Markets report puts hard numbers on what the AI boom means for office demand. AI-backed companies have leased more than 21 million square feet in San Francisco and Silicon Valley alone since 2019, and the pipeline is accelerating …8.1 million square feet of AI tenants are actively in the market across the five largest U.S. tech gateways right now. The tech industry's share of total U.S. office leasing jumped to 23% in Q1 2026, up from 17% in all of 2025. The scale of capital behind this is worth sitting with: hyperscalers have spent $1.1 trillion on AI infrastructure since 2021 and are projected to spend $3.7 trillion more over the next five years. That level of sustained investment creates companies with people that need places to collaborate. The 15 largest VC-backed AI firms alone grew their global workforces from 7,500 employees in 2020 to 48,000 in 2025. Read more here.

The supply story continues to sharpen. Per CBRE's Q1 2026 office report, the under-construction pipeline is now down 87% from its 2020 peak, and quarterly completions just hit their lowest level on record. Meanwhile, prime vacancy nationally fell to 12.7%, with Midtown Manhattan's prime vacancy rate at just 2.9%. Average asking rents rose 2.2% year over year, the fastest pace in six years. The market is not recovering uniformly, but in the segments that matter (well-located, high-quality assets) the supply-demand equation is increasingly working in the landlord's favor. Less new product coming online means existing quality assets hold pricing power longer. This is the environment where owning the right buildings matters most. Read more here.

Per Collier’s Q1 National Office Report, national sublease availability has now declined consistently since its peak in 2023, falling 16.2% year over year to 163.2 million square feet at the start of 2026. Sublease space is the shadow inventory that has quietly suppressed effective rents and given tenants outsized leverage for years. Its steady absorption is one of the least-covered but most important indicators of a genuine market turn. As it disappears, landlords regain pricing power and the bifurcation between quality assets and the rest sharpens further. See Collier’s Q1 National Office Report here.