The State of the Office Market is Increasingly Distinct from the State of the Economy
Although it’s clear that office attendance remains below pre-pandemic levels, differences in office demand and work-from-home rates across U.S. cities are not uniform and not always well understood.
The resurgence of office demand depends on the mix of office-using industries and the types of work done in each city. While the advantages of working from home are fairly similar, the friction caused by remote work is greater in some lines of office-using work than others. The amount of friction, as well as the surrounding attitudes towards remote work, can be as crucial in determining office demand as the strength of the economy or the growth in office using jobs.
Ultimately, short-term office demand is no longer the best indicator of a city or region’s economic state. Cities and metropolitan areas with cutting edge economies may have less than average office demand at the moment, despite also having better than average prospects for economic growth and longer-term office demand.
There is a gap in office demand between remote-friendly and less remote-friendly cities
There is a clear and persistent gap in office demand between two groups of cities nationally that we have dubbed “less remote-friendly” and “more remote-friendly.” Remote-friendly cities have a higher percentage of jobs that can be done remotely (including in non-office-using sectors).
The remote-friendly cities tracked by the VTS Office Demand Index (VODI) are Boston, San Francisco, Seattle, and Washington, D.C., whose remote-friendly job shares are about 40 percent. The less remote-friendly cities tracked are Chicago, Los Angeles, and New York City, whose remote-friendly job shares are slightly above 30 percent.
During the last quarter of 2023, the VTS Office Demand Index (VODI) estimates that new demand for office space in Chicago, Los Angeles, and New York City flowed in at 63 percent of its pre-pandemic pace, while Boston, San Francisco, Seattle and Washington, D.C. flowed in at just 38 percent of pre-pandemic. While office demand is stronger in the less remote-friendly markets, the width of that gap has varied over time, though it has persisted since September 2020.
While those cities are grouped based on the share of jobs that could be done remotely, the difference between them likely stems from differences in the industry and occupation mix of their office-using sectors, and/or broader work-culture differences in embracing remote work.
Some industries, e.g. in the FIRE and third sectors, are more averse to remote work
The gap in office demand is even more pronounced when looking at specific industries. One way to understand the relationship between a city’s industry mix and office demand is to group office tenants into three industry categories:
- TAMI: Technology, Advertising, Media, Information
- FIRE: Finance, Insurance, and Real Estate
- Third sector: This includes all other sectors such as professional services, legal, government, and healthcare, as well as energy and nonprofits
Using this grouping and VODI data, the demand for office space among TAMI clients saw the greatest decline in office demand. FIRE also lost ground but at a lower rate. The third sector, spanning professional services, legal, government, and healthcare, as well as energy and nonprofits, increased and made up for much of the TAMI sector's decline.
Across the cities tracked by the VODI, the share of new office demand emanating from the TAMI sector decreased by 11.3 percentage points from the beginning of 2020 to the end of 2023, which amounts to a 35.1 percent decline. The FIRE sector’s share of new office demand fell by 3.1 percentage points, a 10.6 percent decline, a small change compared to the other sectors’ changes. In contrast, the third sector’s share increased by 14.4 percentage points, or 37.3 percent, filling the void left mostly by the TAMI sector.
When looking at how these differences in industry demand track to cities, San Francisco and Seattle stand out for having both prominent tech sectors as well as having less demand for office space than other cities post-pandemic. In contrast, Chicago and New York City have more jobs in traditional industries like finance, insurance, and real estate and have seen a greater resurgence of demand.
Why has the demand for office space fared differently across sectors?
A straightforward explanation for the gap in demand for office space is that it ultimately reflects differences in the nature of work involved. Some types of work, like coding, are especially amenable to being done remotely, e.g., because they involve large swaths of solo work. On the other hand, other types of work are more interactive by nature, and benefit more significantly from in-person collaboration and relationships. Work in the TAMI sector could simply be less dependent on face-to-face interaction than in the FIRE or third sectors.
The industry mix explanation has its limits
Alongside such material differences in the nature of work, there could also be cultural differences across sectors in terms of their attitude towards remote work. Anecdotally, the FIRE and third sectors have been more demanding that employees return to the office.
Furthermore, such cultural differences in the attitude towards remote work need not be sector-specific. They certainly flow along employer lines, owing to the views of leadership, and they could very well have a regional component that colors the experience in different cities. A so-called cultural explanation that extends beyond sector lines is necessary for explaining the relative dearth of new office demand in Washington, D.C.
There could also be an impact on office demand from the leading employer or industry in a region. For example, finance may play an outsized impact on non-finance employers in New York, just as tech may do the same in San Francisco and Seattle. In Washington, D.C., the slowness of return to office for the federal government (historically a more traditional sector) may have an outside impact on other office tenants and firms.
And, of course, there are other factors that could help explain disparities in cities’ return-to-office levels. New York City stands out among US cities for being in a league of its own with respect to urbanity at a large scale, and a facet of that is that New Yorkers are more likely than other Americans to live in small apartments that are not as amenable to work from home as suburban dwellings. That matters. So do considerations around cities’ typical commute times, and the distinction between commuting by vehicle and transit.
This is why the U.S. stands out from most other parts of the world in the high percentage of remote work. American homes tend to be larger and more accommodating of work-from-home than in most other parts of the world.
The state of the office market is distinct from the state of the economy
Where before there was a direct relationship between employment in office-using sectors and demand for office space, now that relationship is mediated by industry attitudes towards remote work. That means that office demand may no longer be the direct reflection of regional economic strength that it used to be.
The following chart shows that cities with higher growth in office-using employment have lower levels of office demand per the VTS Office Demand Index.
This new reality is good economic news for the regions with remote-friendly cities whose office demand remains low, by historic standards. Today, regions with less office demand may still have dynamic economies, including economies that generate lots of job growth in knowledge industries and other office-using sectors. Over time, and with ongoing economic growth, those economies will likely see office demand rise again, even if key local industries like tech maintain a higher share of work from home days than more traditional ones.
Given that some sectors embracing remote work more tightly are also those showing the most growth, we could see an increasing disconnect between the well-being of the office sector and the strength of the regional economy. In the past, cities with strong office sectors tended to have stronger economies, but now these two attributes are growing apart, and you can have a still-recovering office sector and a strong economy.
