The office has been a major casualty of the pandemic, with many companies operating remotely and employees working from home. Demand for office space has plummeted since March, with companies big and small pushing back their return to the office, sometimes indefinitely. But according to a new index tracking office demand in seven major U.S. markets, while offices seem to be down, they’re not completely out.
Nationally, demand for office space in October was down more than 56% compared to February, before the pandemic, according to data from VTS, a commercial real estate leasing and asset management platform. That’s up from the lowest point in May, when demand was 84% lower than before the pandemic.
These numbers come from the new VTS Office Demand Index, based on its data from commercial landlords in major markets, tracking when potential tenants tour available office space. In development for about 10 years, this is the first public release of the index, which is based on data from October, before the current surge in COVID-19 cases throughout the U.S. as well as the approval of several vaccines. A slowly rising number of tours taken by potential tenants suggests that companies are gradually getting back to working from, well, work.
In specific markets, though, the numbers tell a more complicated story. In New York, demand for office space is down more than 66% compared to February, while the decline is closer to 50% in Chicago and Seattle, and 42% in Washington, D.C.
But there is one bright spot in the dark office scene, according Nick Romito, CEO and cofounder of VTS. The biggest comeback has been in Los Angeles, where demand is only about 26% lower than what it was in February. “Most other markets in the past 30 or 60 days have started to drop off a bit, but L.A. has climbed back to almost 70% of where they were pre-COVID,” says Romito. He suggests the demand is coming from the creative community in Hollywood, as well as tech companies in the region that have been leasing at rates comparable to before the pandemic.
The geographic differences in demand are partly a response to the varying operations of different industries, Romito says, but are probably even more closely connected to COVID-19 case counts. The waves of infections in New York, he says, directly correlated with drops in office demand.
Before the pandemic, New York was “the strongest market in the country, then had the largest contraction, but then the biggest comeback,” he says. “But again as you saw case count go up, now the contraction is happening again.”
The market with the steepest drop is San Francisco, where demand is more than 76% lower than before the pandemic, when demand was already on the decline. According to VTS data going back to January 2018, demand for office space in San Francisco was down long before the outbreak. “So they were going the wrong direction before this happened,” Romito says. “It’s also probably the most speculative tech market in terms of early companies that are coming to market, and those companies have taken a hit as part of this.” The result for startup-heavy cities like San Francisco could be a surfeit of empty office space, turning once thriving downtown cores into half-vacant ghost towns.
Though it’s hard to say exactly what the latest surge in COVID-19 cases will mean for office demand going forward, Romito says there are a few indicators that certain types of office space are heading for a comeback. In New York, for example, premium office buildings accounted for nearly 70% of all tours. “It’s the only market in the country right now where we’re seeing this flight to quality,” Romito says. “It’s obviously opportunistic. This is the first time in 8, maybe 10 years where you’re going to see a decline in pricing. So that space that was maybe out of budget eight months ago now becomes a real opportunity.”
Subleasing is also expected to be a big theme in the coming months, as companies either fold or decide not to return to their leased office spaces after all. The next edition of the VTS Office Demand Index will be out in January, and will likely give an even better picture of where demand is, and isn’t.
Overall, Romito says, the situation is too fluid to make any predictions about what this will mean in the long run, but we could know in early 2021 just how different the office scene will be in the near-term. “There’s a whole variety of data points that will come out in the next six months that will be highly interesting and really unique to the past 10 years,” Romito says.