While Office Demand In Most Cities Remained Stable In February, Tours for NYC's Trophy & Class A Spaces Spike

New demand for office space began to come out of its seasonal winter slump in February, albeit more mildly than in years past. February typically marks the first month of the spring upswing in new office demand. This year, demand for new office space rose 4.3 percent from January, the slowest pre-pandemic pace in February on record according to the latest VTS Office Demand Index (VODI) analysis. 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.

Nationally, the VODI increased slightly from a level of 46 in January to 48 in February, but remained 12.7 percent below its level a year ago. According to VTS' analysis, this latest uptick extends a spell of uncharacteristic stability. Ever since it fell from 63 to 52 between June and July of last year, the VODI has remained relatively steady.

"The office leasing market came out of hibernation as it always does in February, and all eyes are on March to see if we see the burst of spring activity that we're used to," said Nick Romito, CEO of VTS. "Recession fears, the job market, and return-to-office rates remain the trifecta of factors to watch. The gradual pace of return-to-office coupled with troubling economic concerns are understandably keeping some employer's office leasing decisions sidelined until outlook becomes clearer. For landlords, the name of the game will be tenant retention and focusing on relationship building while we wait and see what new demand levels look like this spring."

Locally, five of the seven cities tracked by the VODI experienced relatively small swings of less than 10 percent. Demand for new office space in Los Angeles and Washington, D.C. dropped 8.2 percent and 5.8 percent from January, respectively, while San Francisco (up 3.6 percent) and New York City (up 7.7 percent) rose slightly. Seattle remained flat month-over-month. Chicago and Boston were exceptions. The Chicago VODI rose 10.6 percent from 47 in January to 52 in February. The Boston VODI reported the largest monthly office demand increase in February climbing 17.6 percent from 34 in January to 40 in February.

Despite new office demand remaining relatively stable in recent months, Trophy and Class A office spaces - particularly in New York City - have accounted for an increasing share of tours, suggesting a new demarcation between the spaces that continue to draw demand and those that flounder.

New York City's share of office tours in Trophy and Class A office space has been gradually increasing over the past year. In February 2023, 81.6 percent of tours in New York City involved Trophy and Class A office space, up from 76 percent in February 2022. That is the highest rate since October 2022.

"We're seeing that post-pandemic, much of the demand in New York City is centered around the most prime assets," said Ryan Masiello, Chief Strategy Officer of VTS. "Not all office spaces are created equal, and some are far more prestigious and in better locations than others. Our data illustrates the 'flight-to-quality' that's developed as demand for the most prestigious Trophy and Class A spaces tend to be more resilient."

VTS Office Demand Index (VODI)

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