The COVID-19 pandemic has thrown the U.S. office market into disarray. This isn’t surprising considering the uncertainty still surrounding this commercial sector. After all, many companies still don’t know when they’ll bring more of their workers back to the office. And when companies do make this move, it’s uncertain how many will require their employees to work full time in the office and how many will instead opt for a hybrid approach, allowing their workers to complete their work both from home and in the office.
Depending on how many companies take the hybrid approach, employers might not need as much office space and might look to shed some office square footage in the coming months.
This is all reflected in the latest research from VTS, which found that new demand for office space fell for the second consecutive month in October to its lowest rate since the first quarter of 2021. As the report says, this suggests that the initial surge of demand for office space that the country saw after vaccines first ramped up has run its course.
Down 30 percent nationally since peaking in August of 2021, all seven markets analyzed by the VTS Office Demand Index (VODI) saw declining demand for office space over the following two-month period.
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. It is also the only commercial real estate index to explicitly track new tenant demand.
Demand for office space has risen and fallen dramatically during the pandemic, according to VTS. The company said that new demand for office space increased dramatically after bottoming out in June of 2020, rising 444 percent by August of 2021 before this prolonged, seasonality-defying surge ran out of steam.
Since peaking in August, demand for office space fell 15 points in September and 11 in October. It is believed that the large ramp-up was due to pent-up demand, a surge of employers getting off the sidelines and into the market once sentiment brightened in light of the COVID-19 vaccine. The recent decline in new demand for office space suggests that the initial wave of pent-up demand has already been sated.
“As we pass the 18-month mark since the start of the pandemic, employers and employees alike have largely adapted to a new way of working and in many cases, that means permanent remote or semi-remote work,” said Nick Romito, chief executive officer of VTS, in a written statement. “The longer we stay in limbo–the place where, even with vaccines and better COVID-19 treatments, there is still trepidation about returning to work–the greater the likelihood we have a permanent loss of demand for office space and eventually, a new normal. Time is not on the side of office leasing.”
Most VODI cities see demand for office space fall by at least 24 percent
While all core markets experienced a downturn in new demand for office space in October, several markets including Los Angeles, San Francisco, Boston and Seattle experienced declines in excess of 24 percent. Seattle saw the greatest decline, down 31 percent from September to October.
Three markets, New York, Chicago and Washington, D.C., saw new demand fall by 10 percent or less in October, with Washington, D.C. seeing its fifth consecutive month of declines. In the two years leading up to the pandemic, both New York and Washington, D.C. saw meaningful growth in demand in October, distinct from October 2021.
“Each market is unique in its recovery and this month was no different. In October, there was a large spread between the markets that saw demand fall sharply and those that didn’t but there was no rhyme or reason to that behavior. I believe it is purely coincidental,” said VTS Chief Strategy Officer Ryan Masiello in a statement. “What materially impacts the behavior of a market is its respective rates of remote-friendly work. The higher the rate, the less the market has recovered.”
Persistent patterns in remote-friendly vs. office-using markets
The sharp divide between remote-friendly markets and those that are less so remains stubbornly persistent. On average, in October nearly 30 VODI points separated remote-friendly Washington, D.C, San Francisco and Boston from the less remote-friendly markets of New York City, Chicago and Los Angeles. The average VODI separation has been fairly consistent during the past several months.