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.

For the past two years, the office recovery story has been easy to dismiss as a coastal, tech-city phenomenon … a few AI tenants in San Francisco and a handful of Midtown Manhattan trophies carrying the headline numbers. Cushman & Wakefield's Q2 2026 data makes that argument harder to hold. Vacancy declined in 49 of the 92 markets they track (53% of U.S. cities) for the second consecutive quarter, with San Francisco, Orange County, and Midtown Manhattan leading the way but secondary markets including Charlotte and Austin appearing in the top 20. Total U.S. office inventory contracted by 33 million square feet over the past five quarters as conversions remove the most obsolete product from the market, and sublease availability has declined 15% year over year to its lowest level since early 2021. Read more here

Law firms leased 10.7 million square feet across the United States in 2025, up from 10.2 million in 2024 and well above the 7.7 million leased in 2023 — exceeding pre-pandemic benchmarks and representing the legal sector's highest share of total office activity on record, per Savills, and 2026 leasing activity is looking stronger. What's driving it isn't distress or forced moves: 57% of that activity was firms choosing to stay and invest in their current space, while expansions outpaced downsizing. JLL's Q1 2026 Law Firm Report, which tracks leasing patterns across 12 major U.S. markets, reinforces the same story from a different angle. Limited large-block availability drove rents to record highs across top legal markets, with New York's top-tier vacancy falling to just 6.0% and San Francisco view space commanding up to $135 per square foot. The individual transactions tell the same story at scale: Sidley Austin signed 240,000 square feet in Washington D.C., WilmerHale took 201,000 square feet in Boston and McGuireWoods nearly doubled its footprint at 1251 Avenue of the Americas. Law firms are long-cycle planners by nature, and when they commit to space at record volume and record rents simultaneously it is a conviction signal about the long-term value of quality office. Read more from Commercial Observer here, and JLL’s Q1 Law Firm Report here.

Not long ago, San Francisco was the cautionary tale every office bear pointed to. Today it's the most compelling turnaround story in the country. Vacancy fell from 34.7% to 29.7% in a single year, driven almost entirely by AI, a sector that has accounted for 30% of all leasing activity since 2023 and more than three-quarters of net absorption. The numbers underneath the headline are just as striking: 7 million square feet leased in the first half of 2026 alone, already surpassing all of 2025, with asking rents climbing 4.3% year over year to $71.67 per square foot. Anthropic has crossed the 1-million-square-foot milestone in the city. Fifty-three AI companies are actively in the market seeking space right now. The investment sales market is waking up alongside it as roughly 20 office buildings are under contract or on the market, with total sales expected to approach $5 billion this year. Read more here.

CBRE's Q2 2026 Washington D.C. Office Figures report illustrates exactly why asset quality is the only variable that matters right now. The overall market vacancy is 22.2% — a number that, taken at face value, sounds troubled. But peel back one layer and the story changes entirely. Prime vacancy fell another 130 basis points this quarter to 9.3%, with Prime asking rents surpassing $100 per square foot for the first time on record. Meanwhile, Class B vacancy sits at 28.7% (nearly double its rate from ten years ago) with rents essentially flat. These two assets classes exist in the same city, sometimes on the same block, and they are operating in completely different markets. Law firms alone account for 33% of all D.C. leasing this year, and they are not signing leases in Class B buildings. The quality bifurcation is not a trend, it is the market. Investors and operators who own the right product are not exposed to the headline vacancy number… they are exposed to the product tier that sits at 9.3% vacant.