Office Demand in LA and San Francisco Rises for Two Very Different Reasons

Demand for office space dropped sharply across the US in the fourth quarter in every major market but Los Angeles and San Francisco, according to data released this week by the VTS Office Demand Index. 

VTS research, which tracks both in person and virtual tenant tours of commercial office properties, showed that office leasing demand was down 61% year-over year, with a modest recovery this summer sandwiched between two steep dropoffs at the beginning of the pandemic and the end of the year. Demand reached a six-month peak in September, 43 index points, but dropped 26% in the fourth quarter to 32.  

The national VODI in February 2020, right before the pandemic began, was 94. 

While both LA and San Francisco improved their recoveries over the quarter, San Francisco is faring far worse among the two West Coast cities: LA started February 2020 with a VODI of 95, lost 88% of demand by May, and has since gained back 61% of that loss, while San Francisco started 2020 with a VODI of 56, lost 95 percent of that demand within two months, and regained 30 percent since February. 

A recent JLL survey found that San Francisco suffered most in terms of office occupancy, registering a 7.8% decline year-over-year, and experts predict that as WFH becomes more than a passing trend for many companies, markets in the Sun Belt and Mountain West will come out on top. It also remains to be seen how new workplace safety laws in California relating to COVID-19 will impact office demand and leasing strategies.

“Despite a dramatic increase in COVID-19 cases and restrictions in California, and poor unemployment numbers, both Los Angeles and San Francisco saw growth in the fourth quarter but for entirely different reasons,” said VTS CEO and co-founder Nick Romito. “In Los Angeles, the market is largely being propped up by the creative industry, which is significant because once office employment does come back, we could see a boom in the area.

“In San Francisco, the only way to go was up. COVID-19 combined with the downward trend in demand we’ve been seeing since April 2019 brought demand to a near-halt, but we’ve begun to see prospective tenants trickle back, signaling they could be past their bottom.”

Meanwhile, demand in cities like Washington D.C. and Seattle, which showed strong improvement over the summer, dropped off precipitously at year’s end. In New York City, demand was relatively stable from November to December, a period that normally shows a drop of at least 10 index points.  Office demand in Manhattan is still 74% lower than pre-COVID levels, however.