New demand was up 21% in January with San Francisco and Los Angeles rebounding most sharply.
New demand for office space in core markets—measured by tenant tours of properties across the country—increased by 21%, or seven index points, in January 2021, a rate that’s on par with previous years but still smaller than it was pre-pandemic. But recent research by VTS shows that local COVID-19 caseloads are no longer the same demand driver they were.
The VTS Office Demand Index shows that office demand nationally was at 40 index points, as compared to 99 points year-over-year. By way of comparison, demand activity was at 100 in January 2018, a time that was relatively stable for office leasing.
Markets hit hard by COVID typically experienced a dramatic bottoming out in early spring 2020, but those cities with the highest increase in cases over the last three months actually saw demand increase the most. VTS posits that demand in local markets is more related to hyperlocal near- and long-term factors like job growth, vaccine rollout, and public health safety measures.
West Coast cities like Seattle, San Francisco, and Los Angeles showed the greatest tenant demand growth, while Chicago and Boston had the least growth. San Francisco was the absolute lowest of all markets in 2020, with “almost no office tenant demand,” but showed the strongest growth from October to January with an increase of 162%. By the end of last month, the city had recovered 58% of the demand it lost early on in the pandemic and is second only to Los Angeles—a market that has a high percentage of creative industries that use office space—in a return to pre-COVID levels. In LA, demand is now down only 15% year-over-year whereas San Francisco is down 52% over the same period.
On the East Coast, Washington, D.C. is expected to see larger gains as the Biden Administration settles in, and modest growth in January helped turn the tides on the most dramatic slide in office demand during the fourth quarter. In New York City, marginal gains in office-using employment led to an 8 point increase in the index, but the city is the furthest from pre-COVID levels of all markets surveyed, at a 66% decrease year-over-year. Class A product and trophy space in Manhattan accounted for 82% of all toured space last month.
Many tenants are capitalizing on softening rent and snagging concessions as workers return, at least in part, to using offices. Leasing activity from September to November accounted for 50% of total volume last year, according to data from Zoominfo, thanks largely to corporate office expansions. Last year, 539 office-using companies expanded, with Amazon leading the growth in the sector.
“It was no surprise to see demand rise overall in January, as that happens every year, but looking at market-by-market trends shows us that employers are changing their focus,” said VTS CEO, Nick Romito. “Given the ups and downs of COVID-19 cases are having less impact on office demand, many employers are now making long-term decisions rooted in the mental and physical health of their workforce, office culture goals and the local economic and leasing climate. All that said, we are still quite far from a full recovery.”