Office recovery depends on BPO reinvention

From AB Capital's The Opening Bell: Three Moves

Event

Bay Area office vacancy rose to 39.3% in 1Q26, with net absorption at -58,400 sqm after POGO exits. Meanwhile, IBPAP is reviewing IT-BPM targets as AI reshapes demand, despite the sector tracking its baseline path toward $59 billion revenue by 2028.

View

In our view, office demand is becoming more dependent on the next phase of BPO growth. The Bay Area remains structurally oversupplied, while AI is shifting tenant requirements from voice-heavy capacity toward higher-value, skills-intensive operations that may require different space formats.

Catalyst

Key sensitivities include BPO hiring, AI adoption pace, and tenant migration. If IT-BPM headcount still reaches 2.5 million by 2028, office absorption can recover gradually. If automation accelerates displacement, vacancy in POGO-exposed districts could remain elevated for longer.

Action

We think investors should stay selective in office-linked property. Favor landlords with diversified locations, PEZA-ready inventory, and exposure to resilient IT-BPM tenants. Remain cautious on Bay Area-heavy portfolios, where concessions and slower rent recovery may persist.

Disclaimer: The information, analyses, and views contained herein is based on sources which we, AB Capital Securities, believe are reliable, but is not guaranteed by us and is not to be considered all inclusive. It is not to be construed as an offer or solicitation of an offer to sell or buy the securities herein mentioned. AB Capital Securities and its Directors and Officers and/or members of their families may have a position in the securities herein mentioned and may make purchases and/or sales of the securities from time to time in the open-market and otherwise.