Overall Office Space Demand Sinks for Third Month in a Row

Companies continue to sort out how much and what kind of space they need as they emerge from the pandemic. In the meantime, new demand for office space fell for the third consecutive month in August, sinking below half of its average pre-pandemic pace, according to the latest VTS Office Demand Index (VODI) analysis.

The national VODI fell by 6 VODI points, or 11.5 percent, from 52 in July to 46 in August, its lowest level since February 2021.

Demand Will ‘Never’ Return to Pre-Pandemic

Pierre E. Debbas, Managing Partner of New York City real estate law firm Romer Debbas, tells GlobeSt.com that the office sector is unequivocally one of the hardest to be hit by the pandemic.

“Companies have used this as an opportunity to downsize their space, relinquish their space and go fully remote or in some instances, even take on more space to capitalize on the opportunity to take advantage of a down market.

“Now being in year 3 of this new world we live in, we are seeing the big corporations actually making a valiant attempt to require people to come back into the office. If successful, mid-sized and smaller companies may follow suit which will be beneficial to the rebound to the office leasing market.

“Regardless how this shakes out, demand will never be what it was pre-pandemic, however the new reality of the office sector should be much more positive than it is presently.”

Post-Vaccine Wave Skews Numbers

Year-over-year, the national VODI declined 47.1 percent. As noted in recent VODI reports, the year-over-year decline is not concerning in and of itself, because it reflects last year’s so-called Post-Vaccine Wave of new office demand.

“During that wave, demand for office space that was pent-up during earlier stages of the COVID-19 pandemic entered the market in a short amount of time, resulting in a temporary burst of new demand in late spring and summer 2021,” VTS reported. “The large year-over-year declines will temper as the Post-Vaccine Wave fully recedes behind the 12-month mark in October.

Nick Romito, CEO of VTS, said in prepared remarks that 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.

Flexible Lease Terms Buoys Outperforming Market Washington, DC

Locally, all but one market analyzed (Washington, D.C.) reported a decline in August, with New York City, Los Angeles, and Seattle experiencing the largest drops, down 22.8 percent, 14.1 percent and 13.7 percent, respectively, VTS reported.

Anthony Lanier, president and CEO of EastBanc, tells GlobeSt.com that while the office market has yet to rebound to post-pandemic levels, companies are still looking to grow, move, and evolve and are still seeing the need for office space, especially in Washington, D.C.

“However, as the market has changed, so have the needs of tenants,” Lanier said. “We’ve been saying for years that companies are looking for more and more flexibility in office leasing terms, and that flexibility is what will get pen to paper for leases.

“Tenants are looking for flexibility in their lease terms just as much as they are looking for the right building and flexible space to grow into. Landlords, such as EastBanc, who can offer shorter lease terms, cooperative rates, and flexible floor plans will help further push the DC office occupancy toward a greater recovery.”

Seattle a Bright Spot

Giovanni Cordoves, Western regional president, KBS Realty Advisors, tells GlobeSt.com that while office attendance, demand, and leasing has seen fluctuations in 2022 thus far, “we believe the recent, sustained uptick in occupancy since early September speaks to a widespread feeling of safety as more workers believe the pandemic to be over or have evolved into a much more manageable, less severe phase.”

He said that “dire predictions” regarding certain major office markets have not been realized—for example, in Q2, Seattle saw more than 380,000 square feet leased to new or existing tenants, with a majority of those being in Class A buildings.

“These properties offer users access high-quality amenities and conveniently accessible transportation options, features that appeal to the flight-to-quality needs of new or existing market tenants,” Cordoves said.

“Additionally, Seattle is positioned to see more than 400,000 square feet leased by end of this year, pointing to long-term fundamentals in the area that may assist with a solid recovery over the next several years.

“We foresee that firms will continue to move towards a higher prioritization of the health and wellbeing of their employees, seeking office space that offer high-quality amenities such as sanitized indoor air, contactless building features, outdoor patios, and on-site fitness centers–workplace features that make the office an exciting and enjoyable place for businesses of all sectors.

“As such, we expect office attendance and leasing to remain elevated in Q4 as people return from the summer holidays and businesses continue to implement post-Labor Day return-to-office plans.”