New demand for office space took a significant dip in September
After a strong surge in demand for office space throughout most of 2021, new demand took a significant dip in September, according to the latest VTS Office Demand Index (VODI). The index, which tracks new tenant tour requirements in core U.S. office markets, saw a 17% drop from August to September, marking a 28% decline from pre-pandemic averages.
This decrease was observed across all major markets, with Chicago experiencing the steepest fall. Both Chicago and Los Angeles, which had briefly surpassed 2018-2019 pre-pandemic demand levels over the summer, have now returned to earlier-year figures.
Factors Contributing to the Decline
Several factors could explain this downturn. Concerns over the Delta variant and the delayed impact of rising COVID-19 infection rates are likely contributors. Additionally, a seasonal slowdown is expected, although this year’s pullback has been more pronounced than usual. Another possibility is that many employers accelerated their leasing activity earlier in the year, inflating demand in the spring and summer at the expense of the fall season.
Despite these declines, VTS CEO Nick Romito remains optimistic. “While the decline in new demand for office space this month was noticeable, I don’t think it is a cause for concern,” Romito stated. “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 Cities Continue to Struggle
Remote-friendly cities such as San Francisco, Washington, D.C., and Boston remain at roughly half their pre-pandemic demand levels. In contrast, markets with less remote work flexibility—New York City, Los Angeles, and Chicago—are performing better, holding at approximately 80% of pre-pandemic demand. Seattle stands out as an exception, maintaining strong office demand despite a 13% decline in September. The city’s rapid increase in office-using employment has helped sustain leasing activity, even as remote work remains an option for many employees.
Class A Office Space Remains Competitive
Serge Vishmid, Managing Principal of Atlas Capital Advisors, shared that demand for premium office spaces, particularly Class A properties, has remained strong.
Vishmid is currently working on securing office spaces in the Irvine Submarket of Orange County for two significant clients. One client is looking for approximately 8,000 square feet of Class A office space, while the other requires around 75,000 square feet.
In comments to GlobeSt. Vishmid comments,
“In each case, I am in stiff competition with other tenants,…”
“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.”
Market Insights from Industry Experts
John Poulos, Executive Vice President at SK Commercial Realty, noted that Atlanta’s office market remains stable in certain submarkets. However, he pointed to inflation, supply chain issues, and vaccine mandates as factors influencing leasing decisions. “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 shared. He also suggested that some businesses might remain in a “wait-and-see” mode until after the 2022 midterm elections due to economic and political uncertainties.
The next six months, according to Poulos, will be critical for both tenants and landlords. “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.”
Will Office Demand Rebound?
Some experts believe the decline in office demand may be temporary. Christian Giordano, president of Mancini, a New York-based architecture and design firm, suggested that many companies are delaying leasing decisions not necessarily due to health concerns but as a matter of strategy. “Those eager to get back to the office took advantage of ‘deals’ in the market,” Giordano said. “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.”
Giordano expects a turnaround by spring 2022. “In fact, at Mancini, we’ve never been busier with projects throughout New York and New Jersey.”
The Future of Remote-Friendly Markets
Unlike cities with stronger in-office work cultures, San Francisco, Washington, D.C., and Boston continue to struggle with new office demand. VTS Chief Strategy Officer Ryan Masiello questioned whether this slowdown is a temporary lull or a sign of a long-term shift. “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 seen a dramatic decline in office demand since May, when a post-election surge briefly spiked leasing interest. Since then, demand has dropped by nearly 50%, making it the weakest market among core cities.
NYC’s High-End Office Market Holding Strong
Despite overall demand fluctuations, one trend remains steady in New York City: the preference for top-tier office space. In September, nearly 80% of office tours in the city were for Trophy and Class A office spaces, a continuation of a pattern seen since May 2020. While demand for lower-tier office space remains uncertain, premium properties continue to attract interest from tenants looking for the best spaces in the market.
Conclusion
While September saw a notable dip in office space demand, industry experts remain cautiously optimistic. Factors like inflation, political uncertainty, and shifting workplace trends continue to shape the market, but Class A office space remains highly competitive in many regions. As businesses navigate their return-to-office strategies, the next several months will be crucial in determining whether this decline is a temporary fluctuation or the beginning of a longer-term shift in office leasing trends.
New Demand for Office Space Drops in September
by: Paul Bergeron, Oct. 28th, 2021