Prolonged Period of Subdued Office Demand at Half to Two-Thirds of Pre-Pandemic Levels Signals Stability for the Foreseeable Future

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Ryan Masiello

NEW YORK–After two years of demand for office space oscillating between half and two-thirds of what it was before the pandemic, it appears office demand is showing signs of stability around these levels for the foreseeable future.

This determination is supported by persistently prevalent work-from-home rates and a cooling job market that directly impact the need for office space, according to the quarterly VTS Office Demand Index (VODI). The VODI tracks unique new tenant tour requirements 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.

“What the office market has experienced over the past two years is likely what we will see for the immediate future. Although it is showing signs of life amid persistent headwinds, it remains to be seen if the office market will continue to rebound further from pandemic lows,” said Nick Romito, CEO of VTS. “Amidst a cooling job market, new demand for office space has remained fairly consistent over the last two years despite these headwinds, which is a positive indicator of resiliency.”

From October 2021 to September 2023, the average VODI slowly fell 0.4 points per month, or roughly 5 points per year. To put the slow movement into perspective, if the VODI average were to stop falling and then reverse upward at the same pace it is now declining, it would take roughly 10 years to reach pre-pandemic levels.

At a VODI of 51, national demand for office space at the end of the third quarter was just half of the pre-pandemic levels. The current level is two VODI points lower than one quarter ago and three VODI points higher than a year ago. A VODI of 100 is considered normal based on historical norms.

Of the office markets tracked by the VTS Office Demand Index, Seattle experienced the greatest quarterly decline in demand for office space, while Los Angeles experienced the greatest growth despite the writer’s strike that has impacted long-term decision-making in the area.

Demand for office space in Seattle fell 43.2 percent in the third quarter. This was led by a historically abnormal three-month absence of demand from tenants seeking the largest office spaces of 50,000 or more square feet. Tenants seeking mid-sized office spaces of 10,000-50,000 square feet were up during the period, preventing an all-out crash in demand. Still, demand for office space in Seattle in September was just one-fifth (21 percent) of normal.

“Seattle’s very low demand for office space is more reminiscent of the beginning of the pandemic than any other time, and it doesn’t appear to be changing soon,” said Ryan Masiello, Chief Strategy Officer of VTS. “The last and only other time we saw an absence of tenants seeking large spaces was during the beginning of the pandemic lockdown. Given that the Seattle area is densely populated with tech sector jobs that are amenable to working from home, it will likely take some of the big area employers pushing harder for return-to-office, such as Microsoft and Amazon, to reverse this trend.”

Contrary to Seattle, Los Angeles is doing exceedingly well, particularly considering the multi-month strikes in Hollywood. At a VODI of 74, demand is almost the highest it has been since the summer of 2021 when pent-up demand from the pandemic unleashed all at once and the VODI spiked above 100. September’s rise in demand is primarily due to a spike in tenants seeking large spaces greater than 50,000 square feet. New demand for spaces of that size in Los Angeles is now higher than at any time since June 2021.

Q3 2023 VTS Office Demand Index (VODI)

National

BOS

CHI

L.A.

N.Y.C.

S.F.

SEA

D.C.

Current VODI (Sept./Q3)

51

35

47

74

59

40

21

44

Quarter-over-Quarter VODI Change (%)

-3.8%

25%

9.3%

32.1%

-19.2%

-25.9%

-43.2%

22.2%

Quarter-over-Quarter VODI Change (pts.)

-2

7

4

18

-14

-14

-16

8

Year-over-Year VODI Change (%)

6.3%

12.9%

9.3%

19.4%

9.3%

2.6%

-52.3%

-29%

Year-over-Year VODI Change

(pts.)

3

4

4

12

5

1

-23

-18

 

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