AI Is Undermining Wall Street's Faith In Office's Comeback

Wall Street isn’t buying the office market’s recovery, even as buildings fill up, leasing improves and values finally appear to have bottomed. 

Office REIT stocks have sunk this year amid fears that artificial intelligence could permanently reduce the number of workers companies need — and the space to house them.

Compounding those concerns are the massive concessions landlords are offering to lure tenants, raising doubts about whether today’s leasing gains will translate into real cash flow.

“There are probably a whole host of certain job types you could imagine would get more efficient or obsolete, and that makes you question how much space one would need in the future,” said Vikram Malhotra, managing director of real estate research at Mizuho. 

Even the owners of ostensibly best-in-class towers have been affected.

SL Green, the largest owner of Manhattan office space, has lost 16% of its market value so far in 2026 and is down 50% since November 2024. Vornado, NYC's second-largest REIT, is down 11% this year, while BXP, the nation's largest office REIT, is down 9.5%. 

The divergence is stark. While office REITs are sliding, nearly every other real estate sector is ascending. Retail REITs are up 12% this year, industrial is up 9%, hotel is up 10%, and healthcare — including senior housing and life sciences — leads the pack with a 14% gain, according to Nareit. The broader market has held steady, with the S&P 500 flat and the Dow Jones Industrial Average up 2.7%.

The market values of publicly traded office landlords have diverged from the price of the properties they own. The 15 office REITs tracked by Nareit lost an average of 16.4% of their value in the 12 months leading up to Feb. 17. In the 12 months ending in January, office prices rose by 2%, according to Green Street's Commercial Property Price Index.

But prices in the office sector are still 35% off their peak, and the "AI scare trade" — a recent phenomenon in which investors sell off shares of companies they view as vulnerable to technology-driven obsolescence — is making many question whether they will ever recover.

“If there’s an AI boom, we are concerned about job growth,” Malhotra said. “If there’s an AI bust and it doesn’t materialize, we’re still concerned about a recession and job growth. [Office REITs] have a challenged outlook over time.”

The tumbling share prices have ironically coincided with the best office market since the pandemic, especially in large markets like Manhattan, where the biggest REITs operate, and for the highest-quality buildings. 

Companies absorbed 12.5M SF of U.S. office space in 2025, the first time absorption was positive nationwide since 2019, according to Newmark. Four- and five-star buildings, as defined by Newmark, accounted for 52% of leasing in the fourth quarter, despite representing just 34% of the nation's inventory.

Those types of numbers suggest fears about AI impacts are overblown and the sell-off in real estate stocks is premature, Piper Sandler senior REIT analyst Alexander Goldfarb said. AI companies have been among the biggest demand generators for office space in San Francisco and New York over the past year.

“It doesn’t make sense,” he said. “If you look, things are very good, getting better in a way that we’ve never experienced before, and yet the stocks suck. It’s a disconnect.”

SL Green's office portfolio was 93% leased at the end of last year, Vornado's was 90% leased, and BXP's was 89.4% leased — all far healthier than the national average. And while asking rents have risen nationally, the cost of attracting tenants has soared, shrinking landlords' margins.

And the gulf between the percentage of space that landlords report as leased and the amount of space actually generating cash has weighed on REITs' earnings. SL Green's 21.7M SF Manhattan office portfolio was 93% leased at the end of 2025, but only 86.7% of its space is currently occupied by tenants paying rent. 

Vornado CEO Steven Roth said the monetary difference between Vornado's leased occupancy — deals signed with no rent coming in yet — and its economic occupancy is roughly $200M.

“When the very ugly and painful free rent burns off, that’s when the cash starts to become positive,” Roth said.

Concessions like free rent and tenant improvements have been a necessity to get deals done, SL Green CEO Marc Holliday said on the company's earnings call last month, pointing to 2027 as the year operating income will start to climb as a result of two busy years of leasing.

“This is just the reality of 6 million feet of leasing in two years,” Holliday said. “You have to pay the capital, too.”

While Holliday argued that concessions should start to come down as space becomes scarcer, huge tenant improvement allowances have become baked into tenant expectations and will be difficult to reduce.

“You’re not going to get a deal without the free rents,” Goldfarb said. “Restaurants complain about the free bread or free nuts, but you pull ‘em back, and the customers are like, ‘You guys are cheapening out. I can’t believe I have to pay for bread and butter.’”

TI packages were, on average, 69% higher nationwide at the end of 2025 than during 2015-2019, according to Newmark. In San Francisco, TI allowances are 170% higher and average north of $150 per SF. In Dallas, the allowances have doubled. 

“Landlords think they can pull back concessions even more, but the reality is that $150 [per SF] in build-outs doesn’t go as far as it did a few years ago,” Goldfarb said.

Even as the top-line data suggests office leasing is still accelerating nationwide, the underlying metrics for the office real estate business continue to flash warning signs. 

While office-using employment rose 5.3% between 2019 and 2025, occupied office inventory is down 3% over that same period, suggesting a disconnect between job growth and demand, according to Newmark. Asking rents are higher today than in 2020, but effective rents, adjusted for inflation, are down 18%.

Pairing a year of minimal job creation, particularly among white-collar workers, with the increasing fears about AI's impact on the economy, some analysts are questioning whether there will really be a cash cow at the end of the concession rainbow.

“If we have now had two, three years of building occupancy and we’re at the precipice of cash flow growth, and suddenly the future demand growth looks murky, that’s very worrying,” Malhotra said. “If there’s job losses and occupancy losses, then you never get cash flow growth.”