Against a backdrop of economic uncertainty, persistent inflation and rising interest rates, new demand for office space fell in July to just over half of its pre-pandemic pace, according to the latest VTS Office Demand Index (VODI) analysis. Chicago, Boston and New York City recorded the largest VODI declines in July. A key factor these cities have in common is a relatively large share of office-using employment in finance, insurance, and real estate (FIRE) – a sector that is particularly sensitive to the interest rate movements we’ve seen as of late.
The VODI tracks unique new tenant tour requirements, both in-person and virtual, of office properties in core U.S. markets, and is the earliest available indicator of upcoming office leasing activity as well as the only commercial real estate index to explicitly track new tenant demand.
Nationally, new demand fell 11 VODI points from 63 in June to 52 in July, representing a 17.5 percent month-over-month drop to its lowest level since February 2021. While a July decline was normal before the pandemic – the VODI fell by 4.5 percent in July 2018 and by 5.7 percent in July 2019 – this month’s decline is three times greater.
“We’re used to seeing demand for office space cool in summer months, but not at this rate. Unique to 2022 is an economic outlook that is continually shifting, and is likely contributing to a reduction in new office demand, as uncertainty causes some potential tenants to delay or reconsider their current office space needs,” said Nick Romito, CEO of VTS. “It’s also worth noting that this month’s declines come after three months of relative stability in the VODI. Quarter-over-quarter, the VODI is down 20 percent, similarly in the quarterly trend to that of this month’s 17.5 percent fall speaks to that stability. The continued positivity in labor market performance is a hopeful indicator as we gauge employers’ reactions to other economic concerns in the months to come.”
Among the seven core markets tracked by the VODI, Chicago, Boston, and New York City experienced the sharpest office demand decline in the latest reading, which coincides with recent interest rate hikes. Demand in Chicago dropped 29.9 percent to below half of its pre-pandemic pace (a VODI of 47, compared to an average pre-pandemic pace of 100). Boston and New York City fell by 26.1 and 16.2 percent month-over-month, respectively. Office-using employment in all three cities is relatively concentrated in the finance, insurance, and real estate (FIRE) sector. These industries are particularly sensitive to rising interest rates, which aligns with the decline in new office demand being sharper in those cities (for more detail, see this month’s VODI report).
Looking at job posting measures, it seems that the labor market peaked around late 2021 and early 2022, and that despite a slight decline it has remained fairly close to that peak level since then. The tech industry seems to be an exception, and has experienced a more pronounced decline in job postings in recent months, particularly in the tech-heavy San Francisco and Seattle metro areas. According to Indeed job postings, San Francisco and Seattle job postings fell by 9.4% and 9.5% since March, respectively. In contrast, all other VODI markets only saw declines between 1.8% and 6.5% over the same period.
Despite a more pronounced decline in job postings in San Francisco and Seattle, new demand for office space in those cities declined among the least in July, falling 7 percent and 14 percent month-over-month, respectively. They still remain well below their pre-pandemic normal at VODIs of 44 and 51.
“At the city-level, the slight cooling of the job market, does not appear to have impacted new demand for office space so far,” said Ryan Masiello, Chief Strategy Officer of VTS. “Despite recent economic concerns within the tech industry, which have even included layoffs at high-profile companies, office demand in Seattle and San Francisco actually fared better in July than the other VODI-tracked cities, which is likely due to the reluctance of tech firms to reemerge in the market meaningfully from the pandemic trough. It remains to be seen whether these tech-centric markets will see office demand impacted on a larger scale in the coming months.”