Companies trying to bring their employees back to the office even on a hybrid basis continue to struggle to fill those conference rooms, cubicles and corner offices with workers. And that has led to a continued slowdown in the demand from companies across the country for new office space.
According to numbers from the latest quarterly VTS Office Demand Index (VODI) employers are no more active in seeking office space today than they were nearly 18 months ago.
The VODI tracks unique new tenant tour requirements, both in-person and virtual, in core U.S. markets, serving as the earliest available indicator of upcoming office leasing activity. VODI remains the only commercial real estate index specifically monitoring new tenant demand for office space.
Nationally, demand for office space declined by 15.9% quarter-over-quarter, dropping the VODI to 53 from its March 2023 value of 63. A VODI of 100 is considered normal based on historical norms.
This quarter’s downward shift is an example of fairly typical office-market behavior as demand for this space usually peaks in early spring and gradually decreases throughout the summer before rising again before the holidays. However, in 2023, excluding the prime pandemic years of 2020-2021, the second-quarter shift was more dramatic compared to previous years. In 2018, demand fell by 0.9% during this summer lull, followed by decreases of 4.5% in both 2019 and 2020.
“There is a disconnect between what we’re hearing in the news and what we’re seeing on the ground,” said Nick Romito, chief executive officer of VTS, in a written statement. “City leaders and employers have by and large publicly stressed their desire to get employees back into the office, but inside their walls, their executives are dealing with analysis paralysis.”
Romito said that many employers are still uncertain if now is the time to make bets on office space. Others, though, are moving forward, capitalizing on favorable lease terms.
“Right now, the former is dominating the market, and we predict that will continue for the foreseeable future,” Romito said.
While most major commercial real estate markets typically experience a second-quarter decline in demand, New York City and San Francisco diverged from the trend this year. San Francisco witnessed a recent surge in new demand growth, with a 10.2% increase quarter-over-quarter, contributing to its 5.9% year-over-year growth in office demand.
In contrast, New York City’s demand for office space remained nearly flat for the quarter, only down by 3.9%, but showed a year-over-year increase of 7.4%. Among all office markets covered in the report, New York City performed the strongest with a VODI of 73, indicating that new demand for office space has reached 73 percent of pre-COVID levels.
Demand for office space in Chicago fell, too, during the second quarter. According to VTS, demand for office space in the city fell 20.4% when compared to the first quarter of the year. It is down 35.8% on a year-over-year basis.
Struggling office markets like Seattle have faced challenges in getting employees back to the office, as pack leaders like Amazon and Microsoft encountered difficulties despite their desire to have employees return. Loose rules around returning to the office made it challenging to implement a cohesive plan.
Boston reported the lowest rate of new demand for office space among all major office markets covered in the report, with a VODI of 28.