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Against the backdrop of macroeconomic headwinds, office market demand around the country grew in the first quarter of 2026, according to industry reports and commercial real estate specialists. The finance, technology and legal sectors led the growth, particularly in San Francisco and New York City.
The VTS Office Demand Index, or VODI, reached a post-pandemic index level high of 79 at the end of the quarter, an 18% quarter-over-quarter increase and a 13% year-over-year increase. VODI compares demand against pre-pandemic averages.
Technology firm demand rose 109% year over year and accounted for a significant share of national growth, VTS said. Finance and legal sectors experienced quarterly gains of 54% and 41%, respectively. Labor outlooks for all three sectors remain robust, outpacing other office-using sectors, the report says.
The gains come as total office-using employment, a key driver of office demand, dropped 0.5% year over year — a loss of 183,000 jobs since the first quarter of last year. The job opening rate in the information sector fell 3.25% in Q1 from 3.83% a year prior, with openings declining in other sectors as well.
One reason office demand is rising as the labor market contracts is the leverage that slower hiring gives companies to mandate in-office work, VTS says. “Firms [can] mandate more on-site work and thus offset demand reduction,” it said.
JLL said in-office mandate expansions gave its workplace management business a boost this last quarter.
“Workplace management contract renewal rates are stable, and our pipeline is strong,” JLL CFO Kelly Howe said on an earnings call last week. “Client activity within project management remains healthy, particularly in the U.S., positioning us for continued momentum over the near term.”
Going forward, if oil and gas prices stay high, employers’ return-to-office leverage could weaken as employees point to high commuting costs. “Any potential growth in return-to-office trends, however, may face a challenge from elevated short-term energy costs resulting from the oil price shock tied to the Iran War,” VTS said.
“If the conflict would have been solved within four to six weeks, I would have said the impact outside of the Middle East would have been almost unnoticeable,” JLL CEO Christian Ulbrich said on the company’s earnings call. “But with every week this is continuing, we have these higher energy prices … and at some point, they all have to pay for that higher energy.”
Despite concerns that AI will drive down space needs, the surge in AI technology adoption has created a boom for leasing activity, particularly in tech, legal and finance centers like San Francisco and New York City, JLL CFO Kelly Howe, said March 1 during the company’s first-quarter earnings call.
“The AI boom has actually been … a boom for our leasing business as the ecosystems around all of the AI startups [and] financial services have really caused an uptick in activity,” Howe said.
Office demand in San Francisco’s technology sector grew 70% quarter over quarter, making it the only market to beat pre-pandemic levels, VTS said.
Broader growth in demand drove net absorption of office space to reach its highest Q1 total since 2020, according to CBRE. Leasing activity totaled 56.2 million square feet for the quarter, up 0.2% year over year, with activity over the past eight quarters up 11% over the previous period, the firm says in its Q1 office market report.
The overall vacancy rate dropped 10 basis points to 18.6%, while the prime vacancy rate fell 80 basis points to 12.7%, according to the report. Average asking rents increased 2.2% year over year in Q1 to $37.21 per square foot, with taking rents rising 2.7% to $33.35 per square foot.
Under a baseline scenario, AI is expected to create a short-term drag on office real estate demand as companies rely on the technology more and workers less, but over the long-term, demand is expected to rise as the technology leads to more business formation, Cushman & Wakefield says in its AI impact report, released last week.
In the meantime, the technology is leading to what Cushman & Wakefield calls a market bifurcation, in which demand shifts toward high-quality, adaptable space. Other types of space could see a drop in demand, the company says.
Looking ahead, a lack of new deliveries in the next three years in the new construction pipeline is expected to help keep vacancy rates drifting lower, the company says.
“The U.S. construction pipeline is 85% below its Q1 2020 peak,” Cushman & Wakefield CEO Michelle MacKay said on the company’s earnings call May 7. “The dynamic is driving demand into the best located, cloud-based space.”
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