Demand for Office Space Remains Muted, but Stable, as Employers Take a Wait-and-See Approach

Both San Francisco and New York City buck the national trend with a strong quarterly performance, according to the July 2023 VTS Office Demand Index (VODI) quarterly report

Despite consistent news around employer’s return-to-office efforts, often met with employee resistance, data suggests that employers are no more active in finding office space than they were nearly 18 months ago, according to the quarterly VTS Office Demand Index (VODI). 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 as well as the only commercial real estate index to explicitly track new tenant demand.

Nationally, demand for office space fell 15.9 percent quarter-over-quarter to a VODI of 53 from 63 in March 2023, and 15.9 percent annually. The demand downshift is typical behavior in the second quarter as demand typically peaks in the early spring and falls incrementally into the summer months before picking up before the holidays. However, excluding the prime pandemic years of 2020-2021, the second quarter shift in 2023 was more dramatic than in previous years. In 2018, demand fell by 0.9 percent, and by 4.5 percent in both 2019 and 2020. A VODI of 100 is considered normal based on historical norms.

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“There is a disconnect between what we’re hearing in the news and what we’re seeing on the ground. 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,” said Nick Romito, CEO of VTS. “With today’s market conditions and the push-pull of getting employees back into the office, many employers are simply uncertain if now is the time to make bets on office space. Others are full steam ahead, capitalizing on more favorable lease terms. Right now, the former is dominating the market, and we predict that will continue for the foreseeable future.”

While major commercial real estate markets typically experience the same downshift in demand in the second quarter, this year, New York City and San Francisco bucked the trend. San Francisco experienced a recent spurt of new demand growth, as indicated by 10.2 percent quarter-over-quarter growth, to which much of their year-over-year growth of 5.9 percent is attributable.

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In New York City, demand for office space was nearly flat for the quarter, down just 3.9 percent, and was up 7.4 percent for the year. Of all office markets covered, New York City is the strongest performer with a VODI of 73 (new demand for office space is 73 percent of pre-COVID levels).

“What makes New York City such a strong market relative to others is the mix of office jobs and an influential culture of in-office work. Employers make their choices in packs, typically led by a pillar company. New York City’s pack is heavy in-office,” said Ryan Masiello, Chief Strategy Officer of VTS. “In struggling office markets like Seattle, pack leaders like Amazon and Microsoft are having difficulty getting employees back in the office. They want them back but are creating loose rules around it, so it’s not sticking. Once they make a hard-fast shift, others will follow suit.”

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