New Demand for Office Space Ends 2022 Down 21 Percent in December
Economic uncertainty loomed large in 2022, weakening tenants' resolve and cooling the office market. According to the latest VTS Office Demand Index (VODI) analysis, new demand for office space ended the year 31.3 percent below its May 2022 peak, and fell 20.7 percent year-over-year to a VODI of 46 in December. A VODI of 46 indicates that new demand for office space was flowing in at 46 percent of its average in 2018-2019, a benchmark of the pre-pandemic normal. The VODI tracks unique new tenant tour requirements, both in-person and virtual, of office properties in core U.S. markets, and is the earliest available indicator of upcoming office leasing activity as well as the only commercial real estate index to explicitly track new tenant demand.
Both holidays and extreme weather conditions prompted a typical seasonal office demand slowdown in December. However, the December 2022 year-over-year decline was slightly larger than previous years, as indicated by the 14.0 and 11.4 percent declines in December of 2018 and 2019, respectively. Between a tight labor market, layoffs, threats of another COVID-19 variant, and interest rate hikes, this spectrum of economic factors gives pause to prospective office tenants. It can cause them to rethink their office needs, downsize requirements, or shy away from commitment, which can lead to delaying or even foregoing their search for office space.
"The reality is that the outlook for the U.S. economy is still unknown, and expectations of a recession continue to loom large in 2023. Where the economy heads will be the through-thread for office demand decisions as we head into the new year," said Nick Romito, CEO of VTS. "Some 2022 silver lining is the significant momentum in return-to-office trends. The shift to remote work in America was unprecedented and, realistically, it seems unlikely to ever revert in full. But the share of full-time employees working from home has dropped by more than half since the early days of the pandemic. Continued momentum in return-to-office will undoubtedly provide a tailwind for office demand in 2023 and beyond."
Locally, most cities tracked by the VODI declined year-over-year, with the largest declines reported in west coast cities with heavy representation of tech, advertising, media, and information (TAMI) sectors. The largest decline was in Seattle, whose VODI fell 45.8 percent year-over-year, followed by Los Angeles and San Francisco whose VODIs fell 33.8 and 31.1 percent year-over-year, respectively. The smallest decline was in Boston, whose VODI fell 15.2 percent from a year ago, followed by New York City and Chicago, with 15.6 and 24.2 percent declines.
Washington, D.C. bucked the trend and saw office demand rise in December, reporting a VODI increase of 21.3 percent year-over-year. Washington's relatively strong job posting and VODI performance are linked to a high share of public sector employment, which are jobs that typically prefer an on-site presence vs. remote.
"Tech layoffs dominated end-of-year headlines, so it doesn't come as much of a surprise that TAMI-heavy job hubs like Seattle and San Francisco are among the VODI markets that experienced the highest office demand declines. Employers in that sector have also taken a more open, remote-friendly stance towards work, which of course has implications for office space needs as well," said Ryan Masiello, Chief Strategy Officer of VTS. "What will be interesting to watch are shifts in small and large tenant demand in the new year. Small tenant demand is remaining strong as employers continue to calibrate their needs or hold back on larger commitments. According to VTS Data, small tenants accounted for 24.5 percent of the total demand by square foot on average in each quarter of 2022, up 23 percent from Q1 2020."
VTS Office Demand Index (VODI)
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