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Current State of Office Market
New demand for office space fell for the second consecutive month in October to its lowest rate since the first quarter of 2021 suggesting that the initial post-vaccine surge of demand for office space has run its course. Down 30 percent nationally since peaking August 2021, all seven markets analyzed by the VTS Office Demand Index (VODI) saw declining demand for office space over the 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, as well as the only commercial real estate index to explicitly track new tenant demand.

New demand for office space increased dramatically since bottoming out in June 2020, rising 444% by August 2021 before the 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 materialized.

“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, CEO of VTS. “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 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. Seattle, however, is historically a very volatile market that tends to experience big swings in new office demand.

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. “What materially impacts the behavior of a market is their respective rates of remote-friendly work. The higher the rate, the less the market has recovered.”