US Office Leasing Shifts Bargaining Power to Landlords
Summary
Piedmont, Empire State Realty and HNI say scarce US office space is cutting free rent and lifting cash flow: ESRT FAD rose 114% while FFO fell 5%.
The US office space shortage is shifting lease terms toward landlords. Between October 27 and November 3, 2026, office landlords Piedmont Realty Trust (PDM) and Empire State Realty Trust (ESRT), along with office furniture maker HNI Corporation (HNI), said on their third-quarter earnings calls that high-quality office space in their markets has almost no new supply. Tenants are renewing early, landlords are giving away less free rent, and the refits that come with renewals and expansions are lifting large office furniture orders.
Construction has nearly stopped, so tenants cannot find alternatives
Office landlords earn rent on leased floor space. When they sign a new lease, they usually grant a period of free rent and pay for part of the tenant's build-out. The rent a landlord actually keeps after those concessions is called net effective rent. For the past several years, high vacancy forced landlords to offer large concessions to keep tenants.
The change now is on the supply side. PDM management said historically low construction deliveries and ongoing conversions of older buildings have made high-quality office space increasingly scarce. Tenants who see this are renewing early and exercising rights of first offer (ROFA, a tenant's right to negotiate for adjacent space before it is offered to others) to expand [1]. PDM also said its asking rents remain about 40% below the cost of new construction [1], a gap that makes new supply hard to add in the near term.
That leaves landlords with more leverage. PDM is holding large blocks of vacant space in Atlanta and Dallas rather than leasing them quickly; one Dallas block has about 500,000 square feet of prospective tenants, and the company is waiting for better pricing [1]. In New York, ESRT's CEO said the supply of office and retail space at its quality level is limited, with no new supply [2].
Rents and concessions are improving, and cash flow is moving ahead of earnings
PDM's third-quarter leasing data already reflects that pricing power. Its net effective rent rose more than 30% to $29.31 per square foot, free rent declined modestly, and same-store cash net operating income rose 8% [1].
ESRT's numbers show that tighter lease terms improve cash first. In the third quarter, its new office rents were 9.9% above the expiring leases, the 21st consecutive quarter of positive spreads, and new leases averaged nine and a half years [2]. The CFO said the company keeps signing leases with shorter free-rent periods. Over the trailing 12 months, funds available for distribution (FAD, the cash left for dividends after maintenance spending) rose $64 million, or 114%, while funds from operations (FFO), the standard REIT earnings measure, fell 5% over the same period [2]. FAD tracks cash actually received while FFO follows accounting rules, so the two diverge once free-rent periods end and rent starts to be paid in cash.
The tight supply also reaches furniture makers. HNI said 10 million square feet of non-viable office space was taken off the market in the third quarter. Its workplace furnishings orders rose 6% year over year, orders from large contract customers grew solidly faster than those from small and medium-sized businesses, and Steelcase grew faster than the legacy business [3]. HNI's explanation is that furniture demand follows occupied seats and lease events, not only new buildings. Customers who cannot find new space in their market fit more employees into their current office, move to an adjacent suburb or relocate to another city, and each of those creates a furniture purchase [3].
Furniture and fit-out demand now follows lease events
Taken together, these disclosures suggest pricing power is moving to landlords that own high-quality existing buildings, in the form of longer terms, fewer concessions and higher net rents. For furniture and fit-out suppliers, the source of orders is shifting from new building completions to renewals, expansions, densification and relocations. HNI's CEO said a large number of lease expirations will come due over the next 18 to 24 months [3], which will determine how long this kind of demand lasts.
Two limits apply. First, cash conversion lags: Highwoods Properties (HIW), also in the Sunbelt, still grants free rent on new leases, and its third-quarter same-property cash net operating income rose only 0.2%, against 4.1% on an accounting basis [4]. Second, the furniture link has the weakest evidence. MillerKnoll (MLKN) said its North America Contract orders were soft in its June-to-August quarter, which it called a timing issue [5]. When tenants renew early in place, there may also be fewer relocations than HNI describes. The metrics to track are whether landlords' cash net operating income and FAD keep growing faster than FFO, and whether HNI's contract orders keep outpacing the rest of its business.
Which companies could be affected
- Highwoods Properties (HIW): Owns offices in Sunbelt business districts such as Atlanta and Dallas, the same markets as PDM. On its call it said supply keeps shrinking and tenants are seeking renewals three to five years before expiry; about $20 million or more of rent already booked but not yet received in cash is expected to convert to cash in 2027 to 2028 [4], which depends on free-rent periods ending on schedule.
- Interface (TILE): Makes the carpet tile widely used in offices, and corporate offices are a primary end market, so each lease-driven refit can use its products. Its second-quarter corporate office billings rose 5% [6], but a direct link to this round of leasing still needs confirmation in later disclosures.
- Newmark Group (NMRK): Earns leasing brokerage commissions for tenants and landlords as leases close, and its third-quarter leasing revenue rose 26.5%. Management also said that too little high-quality vacant space limits deal volume and expects slower leasing growth in 2027 [7], so scarcity cuts both ways for the company.
Sources
[1] Drillr · Piedmont Realty Trust (PDM) · 2026-10-27 · Earnings call
[2] Drillr · Empire State Realty Trust (ESRT) · 2026-11-03 · Earnings call
Our office and retail property type at our quality level is limited with no new supply.
[3] Drillr · HNI Corporation (HNI) · 2026-11-03 · Earnings call
[4] Drillr · Highwoods Properties (HIW) · 2026-10-28 · Earnings call
[5] Drillr · MillerKnoll (MLKN) · 2026-09-22 · Earnings call
[6] Drillr · Interface (TILE) · 2026-08-07 · Earnings call
[7] Drillr · Newmark Group (NMRK) · 2026-10-29 · Earnings call
This article only helps surface industry changes and companies that may be overlooked. It is not a stock recommendation.