New office space demand slightly increased in September after three straight months of losses, according to a recent VTS Office Demand Index (VODI) analysis. VTS is a commercial real estate industry technology platform that helps building owners make strategic decisions.
The national VODI went up two points from August to September (46 to 48). A VODI score of 50 or less is a sign that the flow of new tenants looking for office space is running at less than half of its pre-pandemic pace in 2018 and 2019. Additionally, the VODI monitors unique new tenant tour requirements, in-person and virtual, of office properties in core U.S. markets. VODI is currently the earliest available indictor of upcoming office leasing activity. It’s also the only CRE index that can explicitly track new tenant demand.
Office space demand has increased four percent nationally month-over-month in September despite slight seasonal headwinds. Demand usually fell in September, pre-COVID—it declined 3.1 percent in September 2018 and 1.1. percent in September 2019. Although there’s been an uptick in September 2022, the VODI has been trending down in recent months as interest rates have gone up and the labor market cools.
“The verdict is still out on the anticipated depth of any upcoming recession,” said VTS CEO Nick Romito. “Combine this economic uncertainty with signs of a cooling labor market, and it’s no surprise employers are pumping the brakes on plans for office leasing. Demand for smaller office spaces in particular has remained steady. This could reflect a dynamic where smaller tenants delay leasing plans while larger tenants shrink their requirement size, making up for lost demand in the small-space category.”
All local markets, besides New York City, saw relatively modest, single-digit fluctuations in September, according to VTS. Office space demand decreased in San Francisco (2.5 percent), Boston (6.1 percent), Chicago (6.5 percent) and Los Angeles (7.3 percent) Meanwhile, Washington, DC, saw demand go up 1.6 percent. Seattle’s VODI stayed flat (44).
As for New York City’s outlier status, it experienced a big VODI drop from 80 in May to 44 in August. Then, it picked up 10 VODI points in September — a 22.7 percent jump month-over-month to make up almost half of its previous four-month loss. The recovery was partly the result of an increase in demand for mid-size spaces in September.
“Demand for office space is still well below its pre-pandemic levels, but after a year of volatility and declining demand over the past few months, September’s relatively modest changes bring some welcome stability to the market,” said Ryan Masiello, Chief Strategy Officer of VTS. “The steadiness of Seattle is particularly notable since it’s typically the most volatile VODI market analyzed. Its steadiness, alongside the minor fluctuations in other markets, signals a broader consistency in demand for office space this September.”