Q1 2026 Office Vacancy Rates and CAM Gross-Up Implications
National office vacancy reached approximately 19.8% in Q1 2026. Here is what elevated vacancy means for gross-up calculations, variable expense classification, and how to avoid silent revenue leakage on your reconciliation.
By Angel Campa, Founder, CapVeri · Updated April 2026
Quick Answer
With national office vacancy averaging approximately 19–20% in early 2026, landlords with gross-up provisions in their leases must apply those provisions carefully. The higher the vacancy, the larger the gap between actual variable expenses and what the lease entitles you to recover. The two critical tasks: correctly classify which expenses are truly variable (not just "feel" variable), and confirm your lease's gross-up threshold is actually breached before applying the adjustment. Misapplying gross-up to fixed expenses — or failing to apply it to variable ones — creates exposure on both sides of the reconciliation.
Where Office Vacancy Stands in Q1 2026
Office market conditions heading into 2026 remain under structural pressure from hybrid work adoption and lease expirations that began accumulating in 2022. National vacancy is tracking near 20% — the highest level in several decades — but the distribution is uneven. Suburban office has fared somewhat better in select Sun Belt markets, while CBD vacancy in gateway cities like San Francisco, Chicago, and parts of Manhattan remains elevated well above 20% in certain submarkets.
For CAM purposes, the absolute vacancy number matters less than one specific comparison: whether your building's occupancy is below the gross-up threshold specified in each tenant's lease. Most office leases written in the 2000s through mid-2010s used a 90% or 95% gross-up threshold. A building at 78% occupied is well below either threshold. A building at 88% occupied may be below a 90% threshold but above an 85% one.
What Elevated Vacancy Does to the Gross-Up Calculation
The gross-up provision exists to protect landlords from vacancy-driven expense underrecovery. When a building is partially occupied, variable expenses — janitorial, HVAC operating costs, some utilities — are lower than they would be at full occupancy. Without gross-up, the landlord recovers only a fraction of what expenses would be at the threshold occupancy level.
At 19-20% national vacancy, the gap between actual expenses and grossed-up expenses is large enough to move the needle materially. Consider a 100,000 RSF office building at 75% occupied (25,000 SF vacant) with variable operating expenses of $400,000 per year. A gross-up to 90% occupancy would adjust those expenses to approximately $480,000 — an increase of $80,000 in the recoverable pool. Distributed across the occupied tenants on a pro-rata basis, that is $0.80/SF in additional recovery per year. Over a five-year lease, that is $4.00/SF — or $80,000 for a 20,000 SF tenant. Failing to apply the gross-up does not reduce the landlord's cost; it simply shifts that cost to unrecovered NOI.
Worked Example: 75% Occupied Building, 90% Gross-Up Threshold
Determining Variable vs. Fixed Expenses at High Vacancy
Variable expense classification becomes more consequential when vacancy is elevated because the gross-up adjustment is proportionally larger. A common error is to use the same variable/fixed split that was established when the building was 95% occupied — when the distinction was effectively academic.
At 75% occupancy, you must revisit each expense category:
- Janitorial and cleaning: Variable. Costs scale with occupied SF and frequency of use. Grossing up is appropriate.
- HVAC operating and maintenance: Partially variable. Operating costs scale with occupied zones; capital maintenance and preventative contracts are fixed. Split carefully.
- Property insurance premiums: Fixed. The premium is assessed on the insured value of the structure, not on occupancy. Never gross up insurance.
- Security and access control: Typically fixed. A monitoring contract does not change when half the building is dark.
- Common area utilities (lobbies, corridors): Fixed. These spaces are maintained regardless of occupancy.
What Can Go Wrong
Gross-up applied to fixed utility base charges
Some landlords gross up the entire utility line — including the fixed demand charges, meter fees, and common area allocations — rather than only the occupancy-driven consumption component. In a high-vacancy building, this error can overstate the grossed-up expense pool by $0.30–$0.60/SF, creating tenant dispute exposure when the reconciliation is audited.
Variable classification based on prior year when building was 95% occupied
A property manager who established the variable/fixed split when the building was near-fully occupied may not revisit that classification after a major tenant departure. Expenses like cleaning contracts may have been renegotiated to a flat fee once the occupied area shrank — making them effectively fixed — while still being grossed up as variable. The classification should be reviewed each reconciliation year.
Gross-up threshold wrong in multi-tenant building with anchor vacancy
In a multi-tenant building, individual leases may have different gross-up thresholds negotiated at different market cycles. If the anchor tenant that vacated held 30% of the building, the building occupancy may now sit at 70% — below every threshold — but a property manager applying a single building-wide gross-up threshold (pulled from the most recent lease) rather than checking each tenant's individual threshold is applying the wrong standard to some tenants.
Frequently Asked Questions
Does high office vacancy automatically trigger the gross-up provision?
Only if occupancy drops below the gross-up threshold stated in the lease — typically 90% or 95%. At 19-20% national vacancy, many buildings are below threshold, but you must verify each lease individually. If the threshold is 90% and the building is 81% occupied, gross-up applies. If the threshold is 80%, it does not.
Which expenses should be grossed up in a high-vacancy office building?
Only variable expenses — costs that increase with occupancy. These include janitorial, HVAC operating costs, and occupancy-driven utilities. Fixed costs like property insurance premiums, security system monitoring fees, and roof repairs should never be grossed up. Misclassifying fixed costs as variable is one of the most common errors in high-vacancy gross-up scenarios.
How does the gross-up denominator change when vacancy is elevated?
The denominator in the gross-up calculation — the RSF figure used to convert total expenses to a per-SF rate — should be the total rentable SF of the building, not the occupied SF. At 75% occupancy, dividing actual variable expenses by 75% of RSF and then multiplying by a tenant's pro-rata share still results in underrecovery unless the numerator is also grossed up. Both numerator and denominator treatment must be internally consistent with the lease definition.
If a major anchor tenant vacated mid-year, how does that affect the gross-up calculation?
Mid-year vacancy changes require a time-weighted average occupancy calculation for the gross-up. If the building was 92% occupied from January through June and dropped to 74% occupied July through December when the anchor vacated, the full-year average is approximately 83% — which may or may not breach the lease threshold depending on the specific lease language. Some leases use end-of-year occupancy rather than average; always check the lease definition.
Related Resources
Gross-Up Clause Explained
How gross-up provisions work and what to check in the lease language
CAM Gross-Up Guide
Step-by-step methodology for calculating gross-up correctly
Office CAM Reconciliation
Complete guide to office property CAM reconciliation
CAM Gross-Up Calculator
Free tool to model gross-up at any occupancy level
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