New Demand for Office Space Drops in September

After a nine-month surge in demand for office space in 2021, which defied typical seasonal patterns, new demand receded significantly in September.

Down 17 percent from August to September, the seven-city VTS Office Demand Index (VODI) is now 28 percent lower than it was, on average, in the years leading up to the pandemic.

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.

All core markets saw demand fall by 13 percent to 23 percent from August to September, with Chicago seeing the largest decline. Chicago and Los Angeles, which briefly exceeded 2018-2019 pre-pandemic averages over summer, have reverted to the levels that prevailed a few months earlier.

Likely factors that could explain the decline in new demand for office space include delta variant concerns and a delayed impact of resurging COVID-19 infection rates, typical seasonality, (though the pullback is more significant than in years past), and a surge of employers collectively shifting their entry into the market sooner, inflating demand for office space in spring and summer this year at the expense of fall.

“While the decline in new demand for office space this month was noticeable, I don’t think it is a cause for concern,” VTS CEO, Nick Romito, said in prepared remarks. “Demand this year has been predictably unpredictable and we should expect to see fluctuations from time to time as we slowly make our way to the other side of this. As we head into the holiday season, I predict volatility will continue.”

Remote-Friendly Markets Struggling

New office demand in most of the remote-friendly cities – San Francisco, Washington and Boston – remains at around half of its 2018-2019 pre-pandemic average. In contrast, new office demand in the less remote-friendly cities of New York City, Los Angeles and Chicago sit at just above 80 percent of the pre-pandemic average. The outlier to the trend is Seattle.

In September, Seattle experienced a considerable decline in demand, down 13 percent month-over-month, but still had a relatively high VODI of 90 in September, the highest of all markets tracked. A core difference between Seattle and other more remote-friendly cities is the distinguished rapid local increase in office-using employment – the increase in office-using hiring increases the need for office space even though not all hires are working from an office. 

Comparing Seattle to San Francisco, a similar tech-dominated city, Seattle had an annualized office-using employment growth rate of 9.8 percent from April-August 2021 compared to San Francisco at 5.7 percent.

John Poulos, Executive Vice President, Managing Director of Tenant Representation, SK Commercial Realty, based in Atlanta, works with a number of leading companies ranging in sizes as a tenant rep.

“Speaking to the Atlanta market, the office sector appears stable and very healthy in certain submarkets. In fact, at SKCR we have seen record sales prices for office assets recently,” Poulos tells GlobeSt.

“Inflation, supply chain issues, vaccine mandates and the effect of these mandates on businesses and their employees is a major factor to the decline in demand. Rental rates seem to be stable now, and tenants are expecting a ‘deal’ for new office space though landlords are not typically offering any of these [discounts] at this time.

Poulos said tenants, especially small businesses, are in a “wait-and-see” mode that may last another year until the 2022 mid-term elections, “as it appears that government spending and other proposals are causing people to remain out of work and causing uncertainty. I believe this uncertainty is not healthy for businesses as they consider returning to the office.”

He said the hyper-inflation is also causing angst in businesses and how they are projecting their growth going forward. “I don’t consider the Delta variant to be a big factor in tenants’ decisions to return to the office at this point,” he added. 

“The next six months will be interesting as decisions are being made by tenants whether to relocate, renew or downsize and for landlords to decide if they will reduce rental rates to make deals with tenants who remain on the fence about returning.”

Poulos suggests tenants who have two years or so remaining on their lease to wait and have their broker follow what deals are being made at what rates, hold out and make a lower offer.”

Class A Competitive in Some Pockets

Serge Vishmid, Managing Principal, Atlas Capital Advisors, said he is seeing demand for quality space, especially Class A office product, has remained “quite robust.”

Vishmid has several office requirements in the works in Orange County’s Irvine Submarket on behalf of two large clients (Class A office space for both, with one being +/-8,000 sf while the other being +/-75,000 sf).

“In each case, I am in stiff competition with other tenants,” Vishmid tells GlobeSt. 

“I recently represented tenants in three leases in the Dallas area, with two being Class A office space projects and one being a Class A retail project. In all three instances, we had competition from other users and we had to move quick.

“In Chicago, I am starting on two tenant requirements this week (both Class A office requirements, with one in Downtown and one in the Suburbs) and preliminary indication leads me to believe that those respective markets are also fairly active.”

Delta Perhaps a ‘Convenient Excuse’

Christian Giordano, president and co-owner of Mancini, a 105-year-old tech-driven commercial architecture and design firm based in New York City, with regional offices in Red Bank and Millburn, N.J., tells GlobeSt, “Those eager to get back to the office took advantage of ‘deals’ in the market. But unfortunately, many other companies are delaying their decisions because it’s easier to wait and see what others do rather than take a stand.”

“I would bet that by spring 2022, we will see these numbers on the rise. In fact, at Mancini we’ve never been busier with projects throughout New York and New Jersey.”

Giordano said Delta has been a serious health issue; however, it has also been “a convenient excuse” for companies to delay making decisions. 

“While some are undoubtedly still in fear, I would argue that most are not living that way and have returned to living normal lives. If we care about New York City, companies may consider making long-term commitments for its future and step up to the plate, as we have.”

Boston, San Fran, D.C. Stall

Unlike what is occurring in the less-remote friendly cities that are thriving given the circumstances, new demand for office space in San Francisco, Washington, D.C. and Boston largely appears to have stalled, VTS Chief Strategy Officer Ryan Masiello said in a release.

“What remains to be seen is if idling will become their new normal,” he said. “If employment doesn’t ramp up similar to what we’ve seen in Seattle, it could be the case for quite some time.”

Washington, D.C. has emerged from a post-election surge of new office demand into a post-post-election “hangover.” 

After bottoming out with a VODI of 24 in July 2020, Washington, D.C.’s VODI plateaued until the presidential inauguration, and then increased very sharply, rising 196.9 percent post-election to a VODI of 95 in May. 

The rapid increase was primarily due to an influx of employers searching for space to support government-related work, something that is characteristic of administrations in transition. Since then, it has declined rapidly, down 49.5 percent to a VODI of 48 as of September, the lowest rate of new demand of all core markets, but in line with remote-friendly San Francisco and Boston.

NYC Tours for Highest-Quality Spaces

In September 79.1, percent of tours in New York City involved Trophy and Class A office space. That is the highest rate since May 2021, though it is not meaningfully different from the 78.9 percent share in August. The share of tours in Trophy and Class A office space peaked at 92.3 percent in May 2020 when overall new demand for office space was at its lowest level.