New Demand for Office Space Rises for the Second Consecutive Month in October

Interest from large tenants drove double-digit office demand increases in Los Angeles, Washington D.C., Chicago, and New York City, according to a VTS Office Demand Index (VODI) analysis

While shifting hybrid work patterns, rising interest rates, and overarching economic uncertainty continue to cloud the future of office use, new demand for office space regained some momentum in October. According to the latest VTS Office Demand Index (VODI) analysis, new demand for office space rose for the second consecutive month, up 8.3 percent from a VODI of 48 in September to 52 in October. The cumulative 6-point increase from September and October has fully reversed the VODI’s August decline and brings the VODI back to its July 2022 level. 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.

Rises in new office demand are typical for October (the VODI rose by 3.2 percent month-over-month in October 2018 and by 12.1 percent in October 2019). However, heading into the seasonally slower time of year for the office leasing market, any substantial resurgence between now and the new year seems unlikely.

“Staying on track with seasonal norms and recording the first 2-month increase streak since early 2021 are both welcomed signs of potential stability in the market,” said Nick Romito, CEO of VTS. “Heading into the end of the year, we’re still left with a lot of unknown. The effect of rising interest rates and where the U.S. economy is headed is weighing heavy on everyone’s minds, and will continue to temper office use decisions, as tenants debate whether to hold off on new commitments or adjust the amount of space they need.”

Locally, each city tracked by the VODI was impacted by either the presence or absence of new demand from large tenants. One group of cities - Los Angeles, Washington, D.C., Chicago and New York City - recorded sizable monthly growth in their VODI levels. The Los Angeles VODI increased sharply, up 37.3 percent month-over-month in October, followed by a 21 percent increase in Washington, D.C., 18.6 percent increase in Chicago, and 13 percent increase in New York City. In each city, there was an elevated inflow of new requirements from large tenants, while demand from small tenants declined.

In contrast, Boston, Seattle, and San Francisco saw office demand fall in October with VODI levels dropping 16.1 percent, 20.5 percent, and 23.1 percent, respectively. Notably, Boston’s decline brought the VODI to 26, its lowest level on record. Seattle and San Francisco saw large tenant demand remain stable at relatively low levels while Boston saw it all but vanish.

“October’s telling a tale of two VODIs. Each city’s office demand was closely tied to job postings and interest - or lack thereof - from large tenants,” said Ryan Masiello, Chief Strategy Officer of VTS. “This divergence could be an interesting reflection of how certain industries are still calibrating the mix of on-and-offsite work. Many have settled into more stable patterns of hybrid work, but it’s largely still in flux. How future office use patterns will play out, combined with the typical long lease terms in the office market, means the transition towards a new ‘normal’ of office demand will take some time.”

VTS Office Demand Index (VODI)

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