Next-Tier Repositioning: How Class B Offices Can Capture 2027's Spillover Demand

INNOWAVE STUDIO · DATA AS OF OCTOBER 2026

Trophy and top Class A office space in the US is close to full, and very little new space is on the way. CBRE put prime vacancy at 12.3% in Q2 2026, against 18.3% for the overall market (CBRE). It forecasts that prime vacancy will return to pre-pandemic levels by the end of 2027 (CBRE), a level that averaged 8.2% (CBRE). In Q3 2026, JLL counted 3.5 million sf of completions against 9.6 million sf removed from inventory (JLL).

That imbalance is pushing tenants down a tier. CBRE expects that “the next tier of assets will begin to see spillover demand” (CBRE). But the spillover is selective. Cushman & Wakefield reports that top-tier vacancy fell 215 basis points over two years, while vacancy in Class B and C properties “has continued to rise” (Cushman & Wakefield). The A-minus and B-plus buildings that win are well located, and their owners have added what occupiers now expect: shared amenity space, outdoor areas, fitness and end-of-trip facilities, better air and building technology.

Market data: prime space is scarce and demand is moving down a tier

National demand is improving. In Q3 2026, JLL recorded a fifth straight quarter of positive net absorption at 6.0 million sf, for 21 million sf year to date (JLL). Leasing volume rose 6.4% over 12 months, and the average asking rent reached $40.51 per sf. Cushman & Wakefield puts national vacancy at 19.8%. It reports that Class A took two-thirds of Q3 leasing, above its 10-year average of 61% (Cushman & Wakefield).

Each firm measures differently, so the levels conflict. Cushman & Wakefield’s Q3 net absorption was only +50,000 sf (Cushman & Wakefield), and CBRE’s vacancy rate runs below Cushman’s. The direction is the same in all three.

Supply is shrinking

• Removals exceed deliveries. CBRE says 2025 was the first year that demolitions and conversions outpaced new completions since it began tracking in 1988 (CBRE). JLL puts inventory more than 45 million sf below its late-2023 peak (JLL).

• Deliveries are at historic lows. Only 7.1 million sf was delivered in the first three quarters of 2026, about one-fifth of the historical average (Cushman & Wakefield).

• The pipeline is thin. Estimates range from 15.4 million sf under construction (CBRE, Q2) (CBRE) to 23 million sf (JLL, Q3) (JLL).

Manhattan shows where this leads

Manhattan trophy vacancy fell to 4.9% in Q3, and overall vacancy fell to 12.6%, the lowest since before 2020 (JLL via CRE Daily). CBRE put Midtown prime vacancy at just 2.2% in Q2 (CBRE). JLL measured lease-count growth of 28.6% a year on Lexington Avenue and 18.4% on Third Avenue from 2021 to 2025 (JLL via CRE Daily).

Avison Young data show Class A and Class B/C base rents differ by $10 per sf but “produce comparable $83 per SF net effective rents” (CRE Daily). In that market, concessions now separate the grades more than demand does.

Spillover is real but uneven

JLL reports that second-generation effective rents rose more than 10%, “benefiting from growing spillover demand” (Facilities Dive). In Dallas–Fort Worth, CBRE data show Class B net absorption swinging from about -359,000 sf in Q2 2025 to about +626,000 sf in Q2 2026 (Connect CRE). Nationally, though, Class B and C vacancy is still rising. CBRE expects overflow demand to favor next-tier buildings in vibrant mixed-use districts whose owners invest in the amenities tenants want (CBRE).

What occupiers will pay for

CBRE’s 2026 occupier survey frames the choice. The top barriers to office attendance are an inconvenient location (62%) and a lack of amenities (53%) (CBRE). CBRE concludes that “fitness facilities and outdoor amenities command the strongest premium over market rates.” Sustainable operations and amenity space are “table stakes, resulting in rent discounts when absent.” Nearly half of the occupiers surveyed are actively pursuing relocation.

The evidence on premiums

The studies differ in method but agree in direction:

• District. Mixed-use “lifestyle” office markets command 32% higher rents than other Class A space and post 12.5% vacancy against 22.5% overall, per JLL’s September 2025 study (JLL). Nearby green space added 180 basis points.

• Amenities. Buildings with tenant lounges posted asking rents 33% above their surrounding submarkets and occupancy gains of 11.3% since 2020, in an earlier Cushman & Wakefield study (Cushman & Wakefield).

• Certification. LEED-certified Class B buildings in Boston earned $9.18 per sf more than non-certified peers in a 2023 CBRE study (Facilities Dive).

• Technology. Between 42% and 54% of organizations, depending on sector, strongly agree they would pay premium rents for technology-enabled space, per JLL (REJournals).

Renovation, not class, separates winners. In Manhattan, Class B’s 2025 leasing gains were concentrated in well-located, recently renovated buildings, according to Propmodo’s analysis of Avison Young data (Propmodo). CoStar data show Class B and C buildings took roughly 40% of Manhattan new leasing in the first half of 2026, up from 31% in 2025 (Commercial Observer).

Upgrades that move leasing

1. Shared conference and event space. The Kaufman Organization is building 5,000 to 10,000 sf amenity centers in its Manhattan Class B buildings where tenants can hold events (Commercial Observer). Shared meeting space ranked among the most sought-after amenities in CBRE’s 2024 survey (CBRE).

2. Outdoor space. It shares the top premium in CBRE’s 2026 survey (CBRE). The Feil Organization is adding a 14,000 sf roof deck open to all tenants at 7 Penn Plaza, a 357,000 sf building (Commercial Observer).

3. Fitness and end-of-trip. Fitness is the other top-premium amenity. Parking and bicycle storage ranked among the most wanted amenities in 2024 (CBRE).

4. Air quality and controls. Top-rated indoor air-quality equipment and tech-enabled building controls were also on that 2024 list.

5. Lobby and arrival. A hospitality-style lobby shapes every tour, though no study isolates its rent effect.

Owners disagree on the payoff. Time Equities’ Brian Soto told Commercial Observer that amenities are “a benefit” but rarely decisive. CBRE advises owners to “look first at the margins before considering large-scale repositions” (Facilities Dive).

Scope and cost: what recent programs spent and achieved

Disclosed 2024–2026 examples show two price points. Building-wide amenity programs cost tens of dollars per square foot; full redevelopments cost hundreds.

Per-sf figures are calculated from owner-disclosed totals and building area, and may exclude tenant improvements and commissions. Bisnow cites PENN 2 at 1.6 million sf; the 10-K figure is used here.

Unit costs for the components

• Amenity centers. The Kaufman Organization built one at One NoMad for around $300 per sf (Commercial Observer). At that rate, a 5,000 to 10,000 sf center costs roughly $1.5 to $3.0 million.

• Spec suites and tenant space. JLL’s 2026 guide puts the average North American fit-out at $295 per sf, from about $255 for baseline to $355 for high specification (JLL). Mechanical and electrical work makes up 29% of a typical fit-out.

• Leasing costs. JLL’s Katy Redmond put average tenant improvement allowances at $107 per sf, with 10.5 months of free rent on 10-year leases (Connect CRE).

Costs are still rising. Rider Levett Bucknall’s national construction cost index rose 4.45% year over year in July 2026 (RLB).

What the rent side looks like

A modernized older portfolio can lease well below trophy pricing. Empire State Realty Trust’s office portfolio was 94.8% leased at June 30, 2026, with Q2 2026 new-lease spreads of +16.1% and an average cash rent of $72.75 per sf on office leases signed in the quarter (ESRT). Manhattan trophy space asks $137.09 per sf (JLL via CRE Daily). That gap is the next-tier opportunity.

Which buildings qualify

CBRE puts the first rule plainly: a building can be upgraded, but a location can’t (CBRE). Screen for location first, then physical fit, then capital.

Capital history matters more than age

CBRE’s Mike Watts defines “older” buildings as those not delivered or meaningfully renovated in the past five years (Connect CRE). In some regions, he said, pre-1970 buildings nearly matched post-2010 buildings on absorption in Q2 2026.

Basis drives feasibility. Beacon paid $125 million for 333 W. Wacker, about $140 per sf, before committing $32 million to upgrades (CoStar). The Feil Organization’s Andrew Wiener said Class B owners are “hard pressed to spend a ton of capital” without a large rent increase (Commercial Observer).

When conversion or demolition is the better answer

Few buildings suit conversion. In 2023, CBRE found that only 1.1% of office space met all its screens: downtown, over 50% vacant, floor plate under 15,000 sf and built before 1980. It put conversion costs at $100 to $500+ per sf (CBRE). Newmark puts the median age at conversion in 10 Midwest markets at 106 years, with 70.3% of candidates built before 1945 (Facilities Dive).

The physical logic cuts both ways. New York’s Office Reuse Task Force noted that deep floor plates limit light and air for housing, contrasting a 1913 building with operable windows against a 1971 tower at about 75% glazing with none (NYC). Plates too deep for apartments are often the best repositioning candidates.

JLL says office sales where buyers intended to renovate grew nearly 30% through August 2026, while conversion-focused sales slowed (Facilities Dive). In Arlington, Virginia, Jemal Real Estate Strategies bought 4100 N. Fairfax Drive, a 271,000 sf building by the Ballston-MU Metro station once planned for residential conversion. It is repositioning the building as office, with tenants staying in place (JLL). Demolition fits when the land is worth more than the building and neither path pencils.

A 2027 action plan for owners

1. Underwrite the submarket, not the national headline

Spillover is visible in Manhattan and Dallas–Fort Worth but not universal. Test it with local leasing by class and net effective rents, not asking rents. If CBRE’s forecast holds, space ready in 2027 meets the tightest prime market since before the pandemic.

2. Sequence the work around tenants

Start with the front of the house. At 701 San Marco in Jacksonville, Bradford Allen’s phase one delivered a two-story lobby, a roughly 10,000 sf fitness center and a coffee bar. Phase two, elevator modernization with destination dispatch and a visitor management system, was due in October 2026 (Bradford Allen). Build spec suites early. At 6400 Shafer Court, three of the five recent leases were under 3,000 sf (Bradford Allen).

3. Pair upgrades with BPS compliance

New York’s Local Law 97 fines buildings over 25,000 sf $268 per metric ton of CO2e above their limit, and limits tighten in 2030 (Facilities Dive). About 57% of properties are projected to exceed the 2030–2034 limits, per NYC Accelerator data cited by Vert Energy Group (Vert). Washington, DC’s first BEPS cycle ends December 31, 2026, and coverage drops to buildings over 25,000 sf from 2028 (Vert).

Fold HVAC replacement into the air-quality upgrade tenants want, and start with quick-payback items: LED lighting, variable-frequency drives and controls. One DC building recouped that spend in just over two years (Facilities Dive). Do not count on the federal 179D deduction, which closed for projects starting construction after June 30, 2026 (Engineered Tax Services).

4. Buy with tariffs in mind

AGC lists tariffs of 50% on goods made mostly of steel, aluminum or copper, 25% on derivatives and 15% on HVAC systems and components (AGC). It recommends a price-escalation clause such as the ConsensusDocs 200.1 amendment at signing. Lock in elevators, switchgear and air handlers early, and carry an escalation reserve. JLL warns that owners waiting for costs to fall “are taking a real risk” (JLL).

5. Align leasing with delivery

Market amenities tenants can tour, not renderings, and target tenants priced out of trophy space. Budget concessions near market: about $107 per sf in tenant improvements and 10.5 months of free rent on a 10-year lease (Connect CRE).

6. Phase the budget

• Phase 1, arrival and amenities: lobby, amenity floor, outdoor space, fitness and end-of-trip, at about $36 to $53 per sf building-wide in the examples above.

• Phase 2, systems: HVAC, controls and elevators, timed to BPS deadlines and lease rollover.

• Phase 3, tenant space: spec suites at roughly $255 to $355 per sf of suite area (JLL).

Before committing capital, test whether the plates, core, facade and roof can carry the program. An early test-fit and phasing study, work that practices such as InnoWave Studio undertake, answers that question.

Sources

1. U.S. Office Market Dynamics, Q3 2026 – JLL

2. U.S. Office MarketBeat Reports, Q3 2026 – Cushman & Wakefield

3. Cushman & Wakefield: U.S. Office Recovery Takes Hold as Sublease Space Shrinks and New Construction Hits Multi-Decade Low

4. U.S. Real Estate Market Outlook 2026 – Office – CBRE

5. Top-Quality Space Leads Broadening Office Market Recovery (Q2 2026 U.S. Office Market Report) – CBRE

6. Prime Office Buildings Benefit from New Working Patterns & Tenant Preferences – CBRE

7. 2026 Americas Office Occupier Sentiment Survey – CBRE

8. Manhattan Tenants Widen Search as Trophy Vacancy Hits 4.9% – CRE Daily via Yahoo Finance

9. Manhattan Office Rents Climb 28% as Demand Broadens Past Trophy – CRE Daily

10. Office recovery continues, but inventory and macroeconomic challenges remain: JLL – Facilities Dive

11. Quality Doesn’t Always Mean Newer Office Space – Connect CRE

12. Mixed-Use “Lifestyle Office Markets” Defy Broader Office Market Challenges, Commanding 32% Higher Rents – JLL

13. What’s Old is Now New Again: Turning Obsolescence into Opportunity – Cushman & Wakefield

14. Taking the cost-effective approach to Class B building upgrades – Facilities Dive

15. Quality amenities? They’re even more important today for office building owners – REJournals

16. The Office Market’s Next Phase Takes Shape in Manhattan – Propmodo

17. For Manhattan Class B Office, the Days of Optional Amenities Are Past – Commercial Observer

18. Chicago revamp shows how older office buildings can stay relevant – CoStar

19. Bradford Allen Completes Six More Leases at Las Olas Centre – Bradford Allen

20. Bradford Allen Acquires 179,000-Square-Foot Office Building in Rosemont, Ill. – Bradford Allen

21. Bradford Allen Adds Four New Tenants at 6400 Shafer Court – Bradford Allen

22. 701 San Marco Completes Phase One Renovation – Bradford Allen

23. Vornado Realty Trust Form 10-K, Fiscal Year 2025 – SEC

24. Robinhood, Dick’s Sporting Goods Taking 125K SF Each At Vornado Tower – Bisnow

25. Empire State Realty Trust Announces Second Quarter 2026 Results – Business Wire

26. Geopolitical headwinds and structural labor constraints reshape North America office fit-out costs – JLL

27. RLB Construction Cost Report North America Q3 2026 – Rider Levett Bucknall

28. The Rise and Fall of Office to Multifamily Conversions: A Real Estate Investigation – CBRE

29. Office Reuse Task Force, Presentation Appendix – NYC Department of City Planning

30. JLL announces major office renovation of 4100 N. Fairfax Drive – JLL

31. Building performance standards have deadlines and penalties: are you ready for them? – Facilities Dive

32. U.S. Building Performance Standards: The 2026 Owner’s Guide – Vert Energy Group

33. Tariff Resources for Contractors – AGC

34. 179D Tax Credit Update: The Deadline Has Passed – Engineered Tax Services