Office Space Demand Below Seasonal Norms, But That’s Okay

Demand for office space fell by just a tick of 1.5 percent nationally from March to April, according to a VTS Office Demand Index (VODI) analysis, representing a departure from the seasonal norm that typically calls for increasing demand during the month of April. 

Some CRE analysts however see that as mostly insignificant and expect gradual improved demand coming in 2022 and beyond despite VODI showing that demand for office space now sits at two-thirds of normal. 

Summer Leasing ‘Always Slows’

Petra Durnin, head of market analytics for Raise Commercial Real Estate, tells GlobeSt.com that office demand always slows in summer months. 

“It is too soon to tell if demand will pick back up in the fall or if we are heading into a recession, and if so, for how long,” Durnin said. “Perception of an impending slowdown has prompted some companies to begin layoffs to cut costs, but so far, it hasn’t impacted a significant amount of the workforce. 

“Concerns about a recession, which could prove to be short-lived, create uncertainty that hinders companies working to establish a clear way forward that will result in a wait-and-see approach about leasing new office space. 

“During the past two years, hiring was such a difficult and costly process for so many companies that layoffs might not be their first cost-cutting measure to prepare for a downturn. 

“Recent stock drops have also stirred recession concerns, but corrections are a common occurrence and not necessarily indicative of a softening market. The hybrid model isn’t going away and more employees are expecting flexibility in the workplace. 

Companies are still eager to grow and strengthen culture, foster collaboration and ideation, and bring back a sense of community. Many employees are looking for more structure or access to mentors to grow their careers, which will positively impact office demand in the future.”

Positive Momentum Continues in NYC

Trevor Adler, a partner at Stroock & Stroock & Lavan LLP who focuses his practice on complex leasing transactions, tells GlobeSt.com that in any market re-strengthening, the uptick in demand can occur gradually over time. 

“The overall increase in demand for office space since its bottoming out in the midst of the COVID-19 pandemic continues to be reflected in deal signings,” Adler said. 

“In the NYC market, the positive momentum continues, but we see a flight to owners offering top-quality space, new stock or concession packages.”

‘Modest Progression’ Seen Nationally

Preston Young, National Head of Office Investor Services and Partner for Stream Realty Partners, tells GlobeSt.com that demand for office space certainly varies by region, “but we continue to experience modest progression in leasing activity across our national portfolio. That said, uncertainty always triggers negative sentiments across financial markets, and commercial real estate is no exception.

“Have economic and geopolitical factors hit a tipping point where a recession is now inevitable? It remains to be seen, but we anticipate the markets to remain choppy through the mid-terms.”

Pre-Leasing Space ‘Pretty Robust’

Phil Ryan, Director of US Office Research for JLL, tells GlobeSt.com that there remains “pretty robust” activity—particularly in terms of pre-leasing—for quality space. 

“Additionally, overall activity within the market continues to improve,” Ryan said. “We’ve seen about 1.1 million square feet of pre-leasing in core trophy product since the beginning of April on top of a 5.4% increase in gross leasing volume in the first quarter.”

Some Employers Cutting Space, Redesigning Offices

CEO of inspace, Elena Beloshapkova, tells GlobeSt.com that office space demand is unlikely to return to pre-covid levels, causing higher rent rates overall. 

“Given the level of acceptance of at least some form of a hybrid approach for office workers, we believe employers will continue their initiatives to cut space where they can and reconfigure space where they can’t, hence the statistics,” Beloshapkova said.

“This doesn’t bode well for office buildings that aren’t focused on helping their tenants improve space usage and employee experience overall. COVID really accelerated the adoption of hybrid as the norm for offices. 

“Now, the conversation is moving toward the role of space and amenities in helping offices transform with lessons learned from hospitality to attract and retain top talent in a very competitive market.”

Aruna Ravichandran, SVP & CMO, Webex by Cisco tells GlobeSt.com that organizations are reconsidering their physical footprint – with those planning for a hybrid strategy 4.5 times more likely to expect a reduction in space of more than 10%.

Pent-Up Demand Shown Post-Pandemic

Because of an abnormal surge in pent-up demand in April 2021 caused by the post-vaccine push to implement office plans that had been on hold during earlier phases of the pandemic, year-over-year comparisons are challenged.

While underperforming nationally by 5.1 percentage points in April compared to the average increase seen in April pre-pandemic, new demand for office space is still up 12.1 percent quarter-over-quarter, according to VODI.

Steve Quick, CEO, Unispace, tells GlobeSt.com that he expects the CRE industry more generally, and office market more specifically, to continue to recover over the next couple of years, “albeit perhaps more slowly than originally anticipated given larger economic conditions.

“We’re optimistic because we believe that flexibility is here to stay and the long-term implications of that will result in companies re-thinking their offices.”

Quick said the industry is in the “early innings” in the shift from presentism to purposeful reasons to be in the office and that the office will need to adapt by having a high degree of experiential elements, along with technology in the office that is as good or better than the alternative of working remotely. 

“One under-examined element of flexible working is the informal mentorship and sharing of ideas that flows more naturally when people are collaborating in person,” Quick said. “The low unemployment rate has also shifted power to employees and will be another factor that supports and embeds flexible working into the reality of how we work—but the office will remain an important part of that mix.”