US office demand slumps as economic fears mount
Against a backdrop of uncertainty, tenants in some of the biggest US markets are delaying or reconsidering their office space needs, according to a report from VTS.
Nationally, demand for new office space fell in July to just over half its pre-pandemic level. The figures come from the latest VTS Office Demand Index, which aggregates new office requirements in core US markets.
Benchmarked against demand in 2018-2019, the VODI fell 17.5%, month-on-month to 52 (compared to a pre-pandemic level of 100). This is the lowest level since February 2021.
While a July decline is normal, VTS said, the fall this year was three times greater than in 2018 (-4.5%) and 2019 (-5.7%).
The report pointed to persistent inflation, rising interest rates and concerns over a possible recession as causes of tenant unease. Although the labour market is strong in the US – with unemployment at 3.5% and the economy adding 528,000 jobs in July – job postings have fallen, suggesting the market might have peaked.
Nick Romito, CEO of VTS, said: “We’re used to seeing demand for office space cool in summer months, but not at this rate.
“Unique to 2022 is an economic outlook that is continually shifting and is likely contributing to a reduction in new office demand, as uncertainty causes some potential tenants to delay or reconsider their current office space needs.”
While the figures are not a direct measure of leasing activity, they are “the earliest available of indicator” of upcoming activity, according to VTS.
Chicago vs Seattle
Chicago, Boston and New York City showed a particular decline in office demand. In Chicago, for example, the VODI fell 29.9% on June – and down 45.3% on the same period last year.
These markets, with a large share of finance, insurance and real estate tenants (referred to collectively as ‘FIRE’), are “particularly susceptible” to rising interest rates, the report argued.
Tenants in these sectors are more likely to hold back on leasing new space as their businesses adjust to rising rates.
By contrast, demand in Seattle and San Francisco – major tech markets – fell 7.3% and 13.7%, respectively. This is despite layoffs in the tech sector and a sharp decline in job listings in the last few months.
Part of this disconnect economic conditions and demand can be explained by tech embracing remote and hybrid work more fully than FIRE tenants. Office demand in cities like Seattle has consistently been well below pre-pandemic levels, having failed – or refused – to bounce back in the way New York or Chicago have. This has severed the link between employment and office demand.
Ryan Masiello, chief strategy officer at VTS, said: “Despite recent economic concerns within the tech industry, which have even included layoffs at high-profile companies, office demand in Seattle and San Francisco actually fared better in July than the other VODI-tracked cities, which is likely due to the reluctance of tech firms to re-emerge in the market meaningfully from the pandemic trough.
“It remains to be seen whether these tech-centric markets will see office demand impacted on a larger scale in the coming months.”