A “For Rent” sign in the financial district of San Francisco, California, USA, on Wednesday, May 3, 2023.
Jason Henry | Bloomberg | Getty Images
A version of this article first appeared in the CNBC Property Play newsletter with Diana Olick. Property Play covers new and evolving opportunities for real estate investors, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large public companies. Sign up to receive future issues straight to your inbox.
Despite the war with Iran and the ongoing economic uncertainty in the USA, demand for office space is recovering strongly.
In the first quarter of this year, new in-person and virtual office tours reached their highest levels since the start of the pandemic, as measured by the VTS Office Demand Index. The index is a future indicator of lease closings in approximately a year or more.
The index rose 18% from the fourth quarter of 2025 and 13% from the same quarter a year ago.
“Despite being tested against a turbulent backdrop, demand for office space has had an exceptional start to the year,” said Nick Romito, CEO of commercial real estate software company VTS, in a press release. “What is perhaps most notable about this quarter’s positive performance is that it was led not only by the ongoing AI boom in technology, but also by the entry of financial and legal companies into the market.”
The increase in demand is curious since office employment is still down 2% from 2022, according to the Bureau of Labor Statistics. Normally this would lead to lower demand for offices, but the decline in employment could also put more pressure on employers to bring workers back to the office.
According to a report from JLL, a commercial real estate services and investment management company, the office vacancy rate for all buildings fell 14 basis points quarter-on-quarter to 22.2% in the first quarter of this year, 30 basis points below the most recent peak in the second quarter of 2025. Vacancy remains highly concentrated, particularly in larger, aging buildings with financially constrained owners, with 10% of office buildings having more than 60 % of the total nationwide vacancy.
As with everything in real estate, the office recovery is local. San Francisco and New York City are the frontrunners in office demand, as AI technology employment is growing rapidly in the former and job diversity is driving growth in the latter. According to VTS, Los Angeles also saw a double-digit increase in demand quarterly, driven by significant growth in the creative industry.
Cities with weaker demand include Boston, which was the worst-performing market in the report. Life sciences offices in this city have suffered a setback due to significant government funding cuts.
Additionally, demand is declining in Seattle, Washington, DC and Chicago as they are not seeing strong job growth.
“The AI boom continues to be a dominant buzzword for offices, and markets that lack a major technology presence or do not have a primary growth lever in another industry are experiencing declines in demand,” VTS Chief Strategy Officer Ryan Masiello said in a press release. “LA’s positive performance was a new bright spot this time around – and it remains to be seen whether Los Angeles can sustain growth in the near term.”
Get Property Play straight to your inbox
CNBC’s Property Play with Diana Olick covers new and evolving opportunities for real estate investors, delivered weekly to your inbox.
Sign up here to get access today.
Choose CNBC as your preferred source on Google and never miss a moment from the most trusted name in business news.