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The basics:

• NAIOP reports 3 straight quarters of positive office market absorption
• Vacancy improving as obsolete office space exits market
• New Jersey office rents rank 4th highest nationally
• Recession fears, slower growth weigh on outlook

Amid a slowing economy, the office sector appears to have found some footing in commercial real estate. However, the question of for how long lingers.

NAIOP Research Foundation released its second quarter report May 28, highlighting three consecutive quarters of positive net absorption through Q1 2026. According to the Commercial Real Estate Development Association, the streak marks the longest sustained period of demand growth since mid-2022. Vacancy has also improved, as the removal of outdated office space continues to outpace new construction.

Despite the milestones, NAIOP noted a significant slowdown in Q2 2026. Considering that downward turn along with decelerated economic growth and job growth, NAIOP projects net office space absorption to total 31.2 million square feet over the last three quarters of the year.

The group said its current forecast assumes a 22.5% chance of a recession. 

The report notes demand in the national office market has remained largely the same since Q2 2024. Nationwide over the past eight periods, quarterly net absorption averaged negative 121,531 square feet — a smaller footprint than most typical suburban office buildings, NAIOP highlighted.

Meanwhile, the U.S. office market eliminated less than 1 million square feet of space during that period. Relative to inventory, NAIOP described the 972,248 total as negligible.

According to the authors, “This period of flat demand contrasts with volatility in the broader economy and reflects how small gains in office use have been offset by tenants continuing to reduce their space.”

Market watch

The office market is characterized by limited new development and selective leasing. Demand for space still seeks out higher-quality buildings, and especially those in urban cores. NAIOP said large tech and finance tenants continue to anchor this activity and pre-lease activity.

NAIOP attributed the slowdown in office buildup to a combination of high construction costs and cautious capital markets. Meanwhile, it noted sublease activity has also trended downward amid reassessments of longer-term space requirements by occupiers. While gradual stabilization is in the cards, the report notes performance varies widely across markets, as well as building types.

Locally, the New Jersey office market continues to reflect a bifurcated trend between high-end Class-A product and older office inventory, NAIOP President and CEO Marc Selvitelli shared with NJBIZ.

“While major law firms and financial tenants are gravitating toward premier amenitized space, many Class-B and Class-C buildings are attracting a different tenant profile, including back-office operations, medical and wellness users and smaller entrepreneurial firms seeking flexibility and lower occupancy costs.

[In New Jersey] Proximity to transit, adaptive reuse potential and competitive pricing are helping many older properties maintain relevance as the market recalibrates.
— Marc Selvitelli, president and CEO, NAIOP

“Proximity to transit, adaptive reuse potential and competitive pricing are helping many older properties maintain relevance as the market recalibrates,” Selvitelli continued.

In New Jersey

Another recent analysis of the 25 largest office markets nationwide put the national vacancy rate in the sector at 17.6% to close out April. The CommercialCafe report released May 19 also notes significant activity from the financial sector.

New Jersey ranks fourth across the U.S. in terms of April 2026 listing rates. The $34.58 per square foot figure represents a 3.4% year-over-year change. Meanwhile, the national price point ($32.91 per square foot) represented a drop of 1.3% 12-month change.

The local vacancy rate dropped 280 basis points year over year. CommercialCafe reported a 16.1% figure in New Jersey for April.

It identified Harborside Financial Plaza 10 (3 Second St.) in Jersey City as the top local listing, with a $66.08 price per square foot rate. A hotspot for residential development, Jersey City also continues to attract office investors. Real Capital Solutions entered the market in April, with its purchase of a 16-story Class A tower.

New Jersey had 1.12 million square feet of office space under construction in April. Among the activity, GSK-spinoff and Advil maker Haleon celebrated the groundbreaking of its bespoke HQ in Berkeley Heights that month. Meanwhile, sales added up to $283 million here.

Looking ahead

The report draws its forecast from both historical economic data as well as office real estate absorption to project future demand.

NAIOP highlighted global economic uncertainty from events like the closure of the Strait of Hormuz, as well as broader consequences of the war with Iran, as contributing factors toward a potential recession in 2026.

Other economic factors referenced in the Q2 paper that should inspire caution include persistent inflationary pressures, increases in the Consumer Price Index and decreases in consumer sentiment, borrowing costs and geopolitical tensions. AI fosters uncertainty as near-term effects like increased capital spending on data centers contend with concerns about potential job losses and other effects.

On the bright side, growing real gross domestic product in Q1, rising equity markets, resilient consumer spending and a relatively low national unemployment rate “economy that
is still expanding, though at a slower and more uneven pace than in prior years,” according to the report.

Looking ahead, NAIOP projects 30.1 million square feet of positive absorption in 2027.