New Demand for Office Space Slows Over Delta Variant Uncertainty
Monthly growth in office-using employment sees the biggest monthly drop in a year, but “there’s no need to hit the panic button yet,” VTS says.
The Delta Variant infected demand in office space in July, as virtual and in-person tour volume dipped, according to the VTS Office Demand Index (VODI). The mark snapped a six-month streak of growth in new demand for office space.
The rise in COVID-19 cases as well as normal seasonal headwinds were factors. Despite this, the monthly decline is lower than the typical July pre-pandemic seasonality in both 2018 and 2019.
“The delta variant is causing some uncertainty across the economy, so it’s no surprise we’re seeing that reflected in demand for office space as well,” said VTS CEO Nick Romito. “But there’s no need to hit the panic button yet. We’re likely looking at another delay to full recovery, but early indications point to continued relative stability as seen earlier in the year—not the massive drop-offs we saw when the pandemic first began.”
Nationally, the VTS Office Demand Index (VODI) is now 16% below its 2018-2019 average, which is used as the ‘100’ point in the Index. The VODI tracks unique tenant tours, both in-person and virtual, of office properties across the nation, and is the earliest available indicator of upcoming office leases, as well as the only commercial real estate index to explicitly track new tenant demand.
New office demand dropped 1.2% in July from June, but is lower than the average July decline in 2018 and 2019 of 5.1%. New office demand is up 282% on a year-over-year basis, reflecting a strong recovery to date.
Opinions range across the board about the office sector’s eventual recovery, with some pundits predicting a permanent decline in office demand, while other experts promising that the category will return stronger than ever.
Trophy and Class A Tours Slow
Sinking demand for Trophy and Class A properties in some markets played a key role in the data reversal.
New York City is seeing a pull-back in the share of demand for Trophy and Class A properties, but prospective tenants still in the hunt are touring larger spaces. The share of tours in Trophy and Class A declined to 72.4% in July from 79.2% in June.
The median square feet of a Class A property tour is up 27%, growing to 10,000 square feet from 7,872 square feet; Trophy is up by 9.8%, growing to more than 13,000 square feet from 12,000 square feet; and Class B is up by 9.1%, growing to 6,000 from 5,500 square feet.
“The macro trend of lower new demand overall, alongside individual requirements of greater square footage, suggests that smaller firms that are more sensitive to the impacts of rising COVID-19 cases are withdrawing from the market,” said VTS Chief Strategy Officer Ryan Masiello.
Not coincidentally, employers slowed the hiring of office-using roles in June. The rate of office-using employment growth in June has fallen to its slowest rate since the depths of the COVID-19 pandemic in June 2020.
Locally, Boston, Los Angeles, and Seattle bucked the national trend with a month-over-month increase in new demand for office space. At a VODI of 116, Los Angeles is the only market to exceed a VODI score of 100, the benchmark of pre-pandemic level of demand. Seattle, despite seeing a substantial 8.6% increase in demand for office space in July, is still 24 points below its pre-pandemic level of 100.