'Ain't No Heaven Till '27': Why Office Development Could Come Back Sooner Than Expected

Despite office demand still recovering more than five years since the pandemic, developers are considering the unthinkable in the not-too-distant future: building a new office building without a commitment from a tenant.

Office vacancy across the U.S. hit a record-high 20.4% in the first quarter, according to Moody's. But vacancy in prime buildings is less than 15%, according to CBRE.

In two years, CBRE projects that rate will be cut nearly in half to 8.2% because of how little office construction has taken place since the pandemic and how coveted the top-quality buildings are.

“Along with this insatiable demand that's going into this very small cohort segment of the trophy product, it begins to make you realize that we're going to run into a challenge,” CBRE Global Head of Occupier Research Julie Whelan said during a panel discussion at the National Association of Real Estate Editors convention in New Orleans last week.

“Our best estimate is that by 2027, we're effectively going to be out of prime trophy space,” she said.

Granite Properties Chief Operating Officer Greg Fuller hearkened back to the office market of the late 1980s and early 1990s when the savings and loan crisis forced the government to create the Resolution Trust Corp., which liquidated loans and CRE holdings at failing institutions.

At the time, legendary billionaire investor Sam Zell coined the phrase “stay alive till '95” for commercial real estate investments. Developer Larry Silverstein was among the first to translate that sentiment to today's market, proclaiming in November 2022, “This is the time to say ‘stay alive to ‘25.’” 

Fuller said he has a new catchphrase for today's office owners and developers in particular.

“There ain't no heaven till ‘27,” he said. “So as a landlord, I'm going to bank on that. It will start to make sense for the best of the best to start to build spec in ‘27 and deliver in ‘29.”

The road to new office development would open after the sector has undergone a historic contraction, with companies reducing their real estate footprints amid the cementing of hybrid work policies and some office buildings built this century rendered obsolete.

Vacancy, though, is likely at a peak, Whelan said. While companies with 10,000 employees or more are continuing to downsize, firms with 1,000 or fewer employees are driving office expansion over the next two years, CBRE found in its 2024 occupier sentiment survey. 

But Fuller said location is more critical than ever for office buildings, especially for premium spaces that need to attract top-of-the-market rents. 

“It doesn't matter how many amenities you put in it. If it's not in the right location, it doesn't have the amenity base inherent to that, it will struggle,” he said.

The best buildings in the best locations have grabbed an outsized majority of tenant demand, even going back to before the pandemic, Avison Young U.S. Office Lead for Market Intelligence Danny Mangru said.

“At least 70% of demand has been with Class-A and trophy, and that's across Atlanta, Manhattan, Dallas, Houston, Boston, Chicago,” Mangru said. “[It’s] just a staggering stat, and this has been, I would say, since 2018 that has been the case.”

Developers are expected to deliver just 17M SF of new office in the U.S. this year, well below the 10-year average of 44M SF, according to CBRE. And the pipeline of new supply will continue to dwindle in the coming months, Whelan said, which will help seed the recovery. 

The landlords who have pulled the trigger and delivered prime new office space are, by and large, commanding and achieving top-market rents. Average U.S. office rents rose year-over-year in the first quarter from $36.73 per SF to $37.12, according to Colliers. Landlords of Class-A and trophy office have been the biggest beneficiaries.

Class-A rents have risen by more than 5% in the U.S. since 2023, according to a March CBRE study. At the same time, Class-B landlords reduced rents by 5.7% on average.

Fuller said new office construction in Dallas is commanding $100 per SF from tenants.

Granite's 626K SF trophy tower called 23Springs, co-developed by Highwoods Properties, snagged several leases since breaking ground in 2022, including with Bank OZK for 110K SF and Deloitte, which will occupy four floors in the spring of 2026.  

Fuller said the developers are benefiting from starting construction when prices were 30% lower and from companies that were unable to expand in their existing office locations needing additional space.

The tenant flight to quality isn’t just benefiting trophy buildings. The buildings that are considered Class-A but not quite trophy, especially those that are renovated and infused with amenities, are gaining leasing traction as well. And in markets like Manhattan, the better end of the Class-B office market is starting to command a growing share of the leasing activity, according to Avison Young.

“I would imagine that same trickle-down effect that we're seeing in Manhattan will sort of translate across other markets, and that's really going to set the stage here for recovery,” Mangru said. 

Whelan echoed that sentiment, saying that 75% of all U.S. office buildings are at least 80% occupied.

“We’re seeing improvement,” she said. “Over half of the markets that we track, just over 30 markets, are seeing improvements in occupancy.” 

CORRECTION, JUNE 25, 1:30 P.M. ET: New office construction generally in Dallas is commanding $100 per SF, according to Fuller, but not Granite Properties' 23Springs office project in Dallas, as a previous version of this story indicated. This article has been updated.