A tech-fueled boost for the office sector?

During the past 12 months, demand for office space surged in cities driven by the tech sector, indicating that tech employers are revisiting their office space needs and considering policies that could require employees to return to the office in some capacity, whether part-time or otherwise.

This is a meaningful shift from a sector that once significantly lagged behind all other industries due to the prevalence of hybrid or fully remote work and, until recently, the broader acceptance of a total return to the office, according to the quarterly VTS Office Demand Index (VODI).

The VODI tracks unique new tenant tour requirements of office properties in core U.S. markets, and is the earliest available indicator of upcoming office leasing activity as well as the only commercial real estate index to explicitly track new tenant demand.

In recent years, demand for office space in markets less reliant on the tech industry surged, with some like Los Angeles and New York City, even getting within the realm of pre-pandemic normal. Meanwhile, the tech-heavy markets of Seattle, San Francisco, and Boston consistently underperformed, until this past year.

On an annual basis, new demand for office space is up 114.3, 31.4, and 25 percent in Seattle, Boston, and San Francisco, respectively — the highest of all cities tracked — while its counterparts in the less tech-reliant markets of Chicago, Los Angeles, and New York City are up just 14.9, 8.1, and 3.4 percent, respectively.

The tech market surge, coupled with slowed paces of growth in non-tech markets, has narrowed the demand gap between remote and less remote-friendly cities. In January 2024, the two had a 27 VODI point difference. Since then, the drop has declined nearly every month; today, it sits at 11.

“Tech giants like Amazon, Salesforce, and Apple are making strategic moves toward bringing employees back to the office, following months of careful planning and office space evaluations,” said Nick Romito, CEO of VTS. “The VODI data reflected this shift starting in early-2024, and the trend shows no sign of slowing down. I anticipate more companies will announce their return-to-office plans in the coming quarters.”

Nationally, demand for office space increased 11.8 percent from Q3 2023 but is down 8.1 percent from Q2 2024. The quarter’s modest decrease in demand is typical of the third quarter.

Locally, demand for office space was up in all markets tracked except for Washington, D.C. At a VODI of just 35, Washington, D.C. had the lowest demand for office space, which is likely due, in part, to employers waiting on the election outcome before deciding on how much, if any, office space they’ll need for the next presidential term.

“Each city has its own unique factors driving or stalling office demand, and the Q3 VODI captures that complexity,” said Ryan Masiello, Chief Strategy Officer of VTS. “Washington, D.C. stands out as the only market where office demand has significantly declined, and it’s no surprise that the upcoming presidential election is causing some hesitancy among tenants. On the flip side, major markets like Los Angeles and New York City continue to hold the top spots for office demand, even with a recent cooling, underscoring their enduring appeal with employers.”