Office Demand Is Back — But the Spread Between Prime and Everything Else Tells the Real Story

Office Demand Is Back — But the Spread Between Prime and Everything Else Tells the Real Story

New national figures suggest the office sector’s recovery is no longer a matter of debate. Net absorption hit 12.6 million square feet in the second quarter, according to CBRE, nearly doubling the prior quarter and marking the ninth straight quarter of positive demand. Leasing activity climbed 16 percent year-over-year and is tracking toward a pace that could exceed 2022, the strongest leasing year on record.

Other indicators point the same direction. Overall vacancy declined 30 basis points to 18.3 percent — the steepest quarterly drop since 2015 — while asking rents are expanding at their fastest clip in six years. Investment volume in office assets is projected to grow 16 percent this year.

For a property type that spent roughly five years written off by much of the market, the turnaround is significant. But the more consequential detail may be what sits beneath the averages.

Two Markets Under One Label

Prime office vacancy stands at 12.3 percent, a 600-basis-point gap versus the 18.3 percent overall rate. CBRE’s data illustrates how extreme the divergence can be: prime vacancy in Midtown Manhattan sits at just 2.2 percent, while some 1980s-era suburban office properties an hour away are effectively unable to secure financing. Both feed into the same national statistic that many investors still use as their reference point.

The concept of flight to quality has become industry consensus, along with the familiar prescription that follows: favor prime assets, avoid commodity product, and underwrite by tier rather than by market-wide averages.

The Divide May Run Within Tiers, Not Between Them

That framing, however, tends to treat the quality divide as a function of fixed physical traits — location, building vintage, floor plates, amenities — as if an asset’s tier is determined the day it trades. Workplace-experience research suggests otherwise. Leesman, which has gathered more than 1 million employee responses on workplace performance, reports frequently finding buildings that look identical on paper landing at opposite ends of the performance spectrum.

In one Leesman study spanning 1,322 workplaces and 476,341 responses, workplaces with unassigned seating scored an average of 79 on the Leesman Index when the space offered genuine variety — evidence that operational and experiential factors, not just physical attributes, may separate winners from laggards within the same tier.

The implication is that the widest performance gaps in today’s office market may exist inside the prime and commodity buckets alike, complicating a strategy built purely on acquisition-time classifications.

What to watch

• Upcoming quarterly office data from CBRE on net absorption, vacancy by tier, and asking-rent growth.
• Whether the prime-versus-overall vacancy spread widens or narrows in coming quarters.
• Office investment volume relative to the forecast 16 percent annual increase.
• Earnings and commentary from commercial real estate services firms, including CBRE, on office leasing pipelines.

Source: original release