Office’s Real Story Is the Spread Between Prime Space and Everything Else

The office market is recovering. The data no longer leaves much room to argue otherwise.

Net absorption nationally reached 12.6 million square feet in the second quarter, nearly double the prior quarter and the ninth consecutive quarter of positive demand, according to CBRE. Leasing activity rose 16 percent year-over-year and is on pace to surpass 2022, the strongest year on record. Overall vacancy fell 30 basis points to 18.3 percent, the largest quarterly decline since 2015. Asking rents are growing at their fastest pace in six years. Office investment volume is forecast to rise 16 percent this year.

For an asset class that spent five years being eulogized, that is a real turn.

It is also an average. And averages are where this market hides the information that matters.

Prime vacancy sits at 12.3 percent. Overall vacancy sits at 18.3 percent. That 600-basis-point spread is not a rounding difference between comparable assets. It is two different markets filed under one label. 

Midtown Manhattan prime vacancy is 2.2 percent. A 1980s suburban office park an hour away is effectively unfinanceable. Both are counted in the same national number, and that number is what most investors still anchor to when they describe the recovery.

The industry has largely absorbed the headline version of this. Flight to quality is the consensus now. The prescription that follows is familiar: Buy prime, avoid commodity, underwrite to the tier rather than the average.

That prescription is correct. It is also incomplete, and the part it leaves out is where the returns are.

The consensus reading treats the divide as a function of physical attributes such as location, vintage, floor plates, amenity package — things visible on a tour and priced at acquisition. Under that logic, which side of the divide an asset lands on is settled the day it trades.

The evidence does not support that. The widest performance gaps are not between tiers. They are inside them.

At Leesman, which measures workplace experience across more than 1 million employee responses, we routinely find buildings that are identical on paper sitting at opposite ends of the performance range. Across a study of 1,322 workplaces and 476,341 responses, workplaces running unassigned seating scored an average of 79 on the Leesman Index when the space offered genuine variety, and 51.1 when it did not. Same asset class. Same nominal strategy. A 27.9-point spread in how well the space actually works for the people in it.

Broaden the lens and the pattern holds. Among workplaces with strong workspace variety, 65 percent score in the top experience band. Among those without it, 17 percent do. Nothing in that difference is about the quality of the shell. All of it is about how the building is configured, programmed and run.

This is the part the market has not priced. Physical quality is legible, and legible things get bid up. Operating capability is not legible. It does not appear in a rent roll, an offering memorandum or a comp set. It shows up 18 months later in renewal behavior, expansion decisions and the tenant conversations that never turn into a broker search.

The gap persists because almost no one has solved it. In a Leesman poll of 129 senior corporate real estate leaders conducted late last year, 65 percent said their organization has not yet found the right approach to hybrid work and office attendance. Fifty-seven percent reported their footprint shrank over the prior 18 months, and 48 percent expect further reduction. 

Occupiers are still resolving what they need. The landlords who can read that in real time and respond will hold space that the tier-based model says they should not.

For investors, this reframes the question. If the divide were purely physical, the strategy would be selection, and selection is a crowded trade at this point in the cycle. Prime assets are being underwritten by everyone with the same thesis and the same comps. If a meaningful share of the divide is operational, the strategy is different. It becomes possible to buy an asset on the wrong side of the spread and move it, which is the only version of this market where the return is not already in the price.

That is not an argument against quality. Quality is real and it is compounding. It is an argument that quality is now the entry fee rather than the edge.

The sorting will get less forgiving each quarter that supply stays at a record low. Buildings do not end up on the wrong side of that line because they were built in the wrong decade. They end up there because no one is operating them like the outcome is still in play.

Chase Garbarino is the co-founder and CEO of tenant experience platform HqO.