New data backs up what commercial office brokers in Seattle have been seeing, with demand for new space falling 7% from June to July and declining 25% year over year.
Commercial real estate tech platform VTS on Wednesday released its monthly VTS Office Demand Index (VODI), which in Seattle fell to 51.
The index, which reflects the total square footage of unique tenant requirements by in-city touring activity in Seattle and six other markets, uses the 2018-2019 average level as a baseline valued at 100.
Seattle’s decline comes against a backdrop of what New York City-based VTS described as a slight cooling of the job market, which has been most noticeable in tech-heavy markets like Seattle and San Francisco. Job posting measures for the San Francisco and Seattle metros fell 9.4% and 9.5%, respectively, since March compared with other markets’ declines that ranged from 1.8% to 6.5%.
“While Seattle and San Francisco’s VODIs have been relatively low for an extended period, the slight cooling of the job market … has not had a discernible effect on those cities’ VODIs so far,” VTS reported.
The shifting balance between remote and on-site work is more pronounced in the tech sector than others, which “likely dulls the relationship between employment and office needs,” states the VTS report.
It noted the prominence of the tech sector in Seattle and San Francisco coincides with low levels of on-site work in the two markets, and said this could help explain the apparent disconnect between Seattle’s and San Francisco’s decline in job postings and their relatively small VODI drops.
Based on cellphone location data provided by Pacer.ai, the Downtown Seattle Association reported office workers returned to downtown in July at nearly 40% of 2019 levels. That was higher than San Francisco’s 18.5%.
Seattle’s VODI drop mirrors what one regional brokerage, Broderick Group, reported at the end of the second quarter. The company observed active tenant demand of roughly 2.2 million square feet of active tenant demand. Before the Covid-19 pandemic there was roughly 5.5 million square feet of active demand.
Higher interest rates and other inflationary pressures have affected material and labor costs, driving higher tenant improvement costs across office leases, the Broderick Group reported, adding, these factors coupled with uncertainty over work-from-home held down office tenant demand.
The month-over-month decline of the Seattle index was smaller than in other cities, with Chicago seeing a 30% drop. Boston and New York City’s indexes fell 26% and 16%, respectively.
Boston, Chicago and New York have a relatively large share of office use in the FIRE, or finance, insurance and real estate, sector, which is particularly sensitive to interest rates. So employers are more likely to have held back on leasing new office space while companies adjusted to rising rates.
Los Angeles’ VODI fell over 12% and San Francisco’s declined 13.7%. Washington, D.C., saw an 8% dip. Nationally, the index fell 17.5%.
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