Newmark: AI Adoption Makes Quick, Broad-Based Office Recovery Unlikely

Newmark researchers crunched the numbers on how the rise of artificial intelligence is likely to impact office usage through the end of the decade. 

The outlook isn’t great. 

Office-using job growth is expected to be flat through 2030, an unprecedented trend outside of a recession, and office occupancy is more likely to shrink than grow. Cumulatively, a “broad-based office recovery in coming years is increasingly unlikely,” the researchers wrote. 

The brokerage’s analysts offered four forecasts based on the pace of AI adoption. Their base case projects a 10-basis-point increase in office vacancy by 2030, even as office-using employment grows by 30 basis points.

The essentially stagnant occupancy projections would play out against the backdrop of already record-high and sticky U.S. office vacancy at 21%. Faster-than-projected adoption of AI in the workplace — 62% of real estate firms are still just experimenting with the technology, a McKinsey & Co. survey found — would have significantly worse impacts. 

Newmark’s worst-case scenario forecasts that office-using employment would fall by 2.2% by 2030 and office vacancy would rise by 210 bps to 23.5%. 

In the upside scenario, where AI doesn’t replace employees so much as augment their work, office-using employment would rise by 2.8% by 2030, pushing office vacancy down 190 bps to 19.5%. 

The analysts found that the office sector wouldn’t fare much better without any AI impacts at all, with vacancy slipping to 19.8% on a 2.4% increase in office-using employment to 2030.

Firms are operating in a “low hire, low fire” posture that is holding back office-using job creation, Newmark found, although the slowdown largely predates this wave of AI adoption. 

Newmark’s downside scenario projects that AI’s impact on office demand will be worse than the Great Recession but not as bad as the rapid rise in vacancy as the pandemic set in. 

The analysts recommend that occupiers build flexibility into spaces and lease terms and design spaces to be focused on collaboration. Investors should focus on top-tier office buildings as the flight to quality in the sector continues, consider clustering investments geographically to unlock cost savings, and be discerning about tenant mixes and their exposure to AI, the researchers wrote. 

AI firms have signed some of the largest leases so far this year. Anthropic signed a 240K SF deal in downtown San Francisco earlier this month, and OpenAI leased a five-building, 450K SF office campus in the same region in March.

At the same time, large firms are looking to cut headcount and square feet through AI adoption, perhaps led by Amazon. The e-commerce and cloud services giant is planning to cut 49,000 desks from its office footprint this year, the equivalent of roughly 14M SF.