We are now halfway through our tenth anniversary year, and amid a long list of macroeconomic factors including a rising price of oil, a spike in Treasury rates, and war in Iran, we continue to see positive activity across our portfolio of properties.
Macroeconomic Setting
The macro picture shifted over the course of the quarter, and we are already seeing it shift again after quarter end. In our first quarter letter, we wrote that inflation had cooled and the Fed had begun to ease. That was accurate at the time. The story since has been more complicated. Inflation has proven stickier, with core PCE up 3.29% year over year through June, and energy has been the wild card as disruption around the Strait of Hormuz pushed oil sharply higher before easing on reports of an interim agreement. Second quarter GDP came in below consensus at 1.5% annualized. At its late July meeting, the Federal Reserve left the funds rate unchanged but struck a more hawkish tone than markets expected. Futures markets are now pricing meaningful odds of a hike in September. That is a very different setup than the one we described three months ago.
What has not changed is the picture in the property markets themselves. Office and industrial fundamentals both improved through the second quarter, in several measures more than they have in years. The result is an unusual environment in which real estate operating fundamentals and the interest rate backdrop are pulling in different directions.
Office: The Recovery Broadens Beyond Trophy
For two years, we have written about the bifurcation between the Class A+ space tenants want and the commodity space they do not. That gap is still there. What changed in the second quarter is that the recovery finally started reaching past the top of the market.
The four research houses we follow put national office vacancy between 18.0% and 20.1% (Colliers 18.0%, CBRE 18.3%, Cushman & Wakefield 20.1%). The spread reflects methodology rather than disagreement, since each firm tracks a different inventory set and Cushman includes a broader pool of older buildings. What matters is that all of them show vacancy falling. CBRE’s 30-basis-point decline was the largest quarterly drop since 2015, with prime vacancy down to 12.3%.
Demand is what drove it. Colliers recorded 16.9 million square feet of net absorption, the strongest quarterly total in seven years. More telling is the breadth: Cushman reports vacancy fell both quarter over quarter and year over year in 49 of the 92 markets it tracks, with 25 markets posting annual declines of more than 100 basis points. The recovery is no longer confined to a handful of gateway cities or trophy assets. Leasing supports the same conclusion, with CBRE recording 62.4 million square feet in the quarter, up 16% year over year, and now projecting that full-year leasing will surpass 2022, the highest annual total on record. Rents have followed, with average asking rent up 2.6% year over year to $37.58 per square foot, the fastest pace in six years.
Estimates of the national construction pipeline range from 15.4 million square feet (CBRE) to 23.4 million square feet (Colliers), and by every measure it is at or near a record low, down roughly 87% from the 2020 peak. First-half deliveries were the lowest CBRE has tracked since it began measuring in 1990. Inventory is actually shrinking, with Cushman reporting U.S. office stock down 33 million square feet over the past five quarters as conversions and demolitions outpace new construction. Sublease space, the overhang that defined 2021 through 2023, is down 15% year over year and down 28% from its peak in 2024. Against this backdrop of declining vacancies, the banks are still very reluctant to lend on office buildings, making it difficult to fund tenant improvements or finance most acquisitions. Therefore, office building values remain suppressed.
Industrial: Demand Outpaces Supply for the First Time Since 2022
Industrial reached an inflection point this quarter, and all four houses agree on it even where the numbers differ.
National vacancy came in between 6.5% and 7.3% (CBRE 6.5%, JLL 6.8%, Cushman 6.9%, Colliers 7.3%), and every one of them showed it declining, with CBRE noting its first quarterly drop since the second quarter of 2022. Net absorption estimates ranged from 59 million square feet (Colliers) to 99.1 million square feet (JLL), a wide gap that again reflects different tracked inventories rather than conflicting conclusions. Colliers framed the significance most directly: absorption of 59 million square feet exceeded the 53 million square feet delivered, the first time demand has outpaced new supply since 2022.
This increase in demand is being fueled by the large-format space, with CBRE reporting leases of 700,000 square feet or more up 125% year over year in the first half and JLL putting Class A big-box vacancy at 5.8%. On supply, completions fell to their lowest level since 2016, but the pipeline expanded to roughly 312 million square feet, the largest since the third quarter of 2024.
As we head into the second half of 2026, we are excited about what is coming down the line.
