As summer came to a close, new demand for office space fell for the third consecutive month in August, sinking below half of its average pre-pandemic pace, according to the latest VTS Office Demand Index (VODI) analysis. The national VODI fell by 6 VODI points, or 11.5 percent, from 52 in July to 46 in August, its lowest level since February 2021.
A VODI of 50 or below indicates the flow of new tenants seeking office space is running at less than half of its pre-pandemic pace in 2018 and 2019. 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.
Year-over-year, the national VODI declined 47.1 percent. As noted in recent VODI reports, the year-over-year decline is not concerning in and of itself, because it reflects last year’s so-called Post-Vaccine Wave of new office demand. In that wave, demand for office space that was pent-up during earlier stages of the COVID-19 pandemic entered the market in a short amount of time, resulting in a temporary burst of new demand in late spring and summer 2021. The large year-over-year declines will temper as the Post-Vaccine Wave fully recedes behind the 12-month mark in October.
“A summer slowdown is typical for office demand, but what remains to be seen is if this downward trend will continue or if we’re simply settling into a new ‘post-pandemic normal’ for office demand levels,” said Nick Romito, CEO of VTS. “Economic concerns, particularly around inflation and rising interest rates, have created a cloud of uncertainty that’s hanging over the office leasing market. Until the economic outlook becomes more clear, some employers may continue to delay or approach the search for office space with caution.”
Locally, all but one market analyzed (Washington, D.C.) reported a decline in August, with New York City, Los Angeles, and Seattle experiencing the largest drops, down 22.8 percent, 14.1 percent and 13.7 percent, respectively. Boston, Chicago, and San Francisco saw modest declines.
Over the last three months, new demand has fallen most in New York City, Chicago, Boston, and Los Angeles, where office-using employment 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. Another factor potentially fueling the greater VODI declines in these cities is the typical client size and adaptability to work from home. These cities’ expected pool of new tenants tends to include many larger employers, who may be adapting to new work-from-home realities slower than smaller, more nimble employers (for more detail, see this month’s VODI report).
“New York City’s office leasing market is facing challenges on multiple fronts as a home to not only a higher density of FIRE sector industries, but larger employers as well,” said Ryan Masiello, Chief Strategy Officer of VTS. “Rather than quantity, there could be a flight to quality happening in the city again, meaning demand for higher-end office space is more robust. The share of Trophy and Class A tours has climbed from 71.2 percent in June to 76.9 percent in August, reflecting a resilience of quality leasing in the market.»