New demand for office space in the US fell for the third consecutive month in August, sinking below half of its average pre-pandemic pace.
VTS, a commercial real estate technology platform, published its VTS Office Demand Index (VODI) analysis today, which found it had fallen 11.5%, from 52 in July to 46 in August, its lowest level since February 2021. A VODI of 50 or below indicates the flow of new tenants seeking office space is running at less than half of its pre-pandemic pace in 2018 and 2019, underlined the company.
Compared to the previous year, the national VODI declined 47.1%. However, it said this isn’t concerning in and of itself, as this reflects last year’s so-called post-vaccine wave of new office demand. In the wave, demand for office space that had been pent up during the pandemic resulted in a temporary burst of new demand in late spring and summer 2021.
All but one market analysed reported a decline in August, with New York City down 22.8%, Los Angeles down 14.1%, and Seattle down 13.7%. Boston, Chicago, and San Francisco saw modest declines.
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“A summer slowdown is typical for office demand, but what remains to be seen is if this downward trend will continue or if we’re simply settling into a new ‘post-pandemic normal’ for office demand levels,” said Nick Romito, CEO of VTS. “Economic concerns, particularly around inflation and rising interest rates, have created a cloud of uncertainty that’s hanging over the office leasing market. Until the economic outlook becomes more clear, some employers may continue to delay or approach the search for office space with caution.”
During the last three months, VTS found that new demand had fallen the most in New York City, Chicago, Boston, and Los Angeles, where office-using employment is relatively concentrated in the finance, insurance, and real estate sector. It said these industries are particularly sensitive to rising interest rates, which aligns with the decline in new office demand being sharper in those cities.
Another factor potentially furling the decline in these cities is the typical client size and adaptability to work from home, said VTS. The cities’ expected pool of new tenants tends to include many larger employers who may be adapting to new work-from-home realities slower than smaller, more nimble employers.
