New York leads 2024 office demand outlook, San Francisco tech sector lags: VTS

New global office demand data from VTS forecasts that New York City will hit 30 million square feet of office leasing in 2024. VTS Co-Founder & Chief Strategy Officer Ryan Masiello joins Market Domination Overtime to discuss commercial real estate trends and what they suggest for the broader market.

Masiello signals that New York represents a market where the headlines do not meet the reality of what is happening on the ground: the city has led office demand recovery since the onset of the pandemic, he claims. The VTS co-founder explains that the firm's modeling looks across 13 billion square feet of office space managed on the VTS platform. According to this data, Masiello says San Francisco's office demand is showing signs of resilience, though the tech sector is 60% behind its pre-COVID office capacity. If interest rates come down, "tech companies can start growing again," Masiello adds.

With the shift to hybrid and virtual labor, office footprints have shrunk only by about 6% from pre-COVID levels, Masielo says. Such work policies aren't impacting the size of companies' office footprints, he adds.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.

Editor's Note: This article was written by Gabriel Roy.

Video Transcript

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JOSH LIPTON: New global office demand data coming out from VTS. Some key points from the survey, London falling behind New York City for the first time and the tech industry having a mass exodus for more on the report, we're bringing in co-founder and chief strategy officer at VTS, Ryan Masiello. Ryan, it is good to see you. So we look to you on for that office demand data. Maybe start Ryan with what you're seeing right here in New York City? What are the trends you're seeing both now and looking ahead, Ryan?

RYAN MASIELLO: Yeah. So listen, New York is a market where the headlines are definitely not meeting the reality of what's happening on the ground. New York is a market that has led the recovery since the onset of the pandemic. And if you look at the VTS demand model, which helps us predict what will drive future leasing activity, it's saying that we're going to break 30 million square feet of leasing this year. Which would just be a huge win for New York and for the office sector in general.

AKIKO FUJITA: Ryan, can you break down that model specifically. I mean, is it based off of leases that you're seeing or what exactly are you breaking down that tells you that there is some optimism on the way.

RYAN MASIELLO: Yeah. So what makes the VTS demand model unique is it looks across the 13 billion square feet that's being managed on our platform. And historically, commercial real estate has operated off of backwards looking demand set. So what deals have been completed? The way that we look at things is what's actually being-- which tenants are actually in the market today? And how does all that come together? And how do we use that data to come together to forecast what we expect?

JOSH LIPTON: And how about swinging over to the other side of the Coast, Ryan. How about San Francisco? It seems like your data was showing you some-- maybe some bright spots.

RYAN MASIELLO: Yeah. I mean, San Francisco is a market that has gotten hit really hard. And it's a market that historically has been very resilient and we're starting to see some positive signals. So over the past 12 months, we've seen 25% of net new demand growth and just given the level, and cost basis of the buildings in that market we actually think it's going to be something that is very attractive for a lot of the institutional investors today.

AKIKO FUJITA: Ryan, what is that demand for? Are we talking about smaller office spaces? Is it about demand for a hybrid model to accommodate something like that? I mean, yes, there's demand but how is that different from what we saw pre-pandemic?

RYAN MASIELLO: I mean, look, the big difference in San Francisco is obviously tech. It's a market that is fueled by innovation and tech is not only the industry that's holding San Francisco back but really the majority of the country. And it has been one of the big differences in the resilience we've seen in London. So just to put that in a perspective on average tech is 60% behind where it was pre-COVID where in London it's only 20% behind.

So in the US and in San Francisco particularly, we really need interest rates to come down. So that tech companies can start growing again and obviously have that impact.

AKIKO FUJITA: But even those that are seeking out some of these office leases. I mean, we're talking about the same footprint.

RYAN MASIELLO: Look, if we look at our data today, we would say that on average office footprints have shrunk by about 6% pre-COVID. It is a little bit more pronounced within the tech sector. But one of the things that we are starting to see is that a company's policy isn't necessarily impacting its footprint. So if a company is requiring people to be in two or three days a week, they're still going to need about the same amount of office space.

And so we think that is-- what is-- we're starting to learn about this those work from home phenomenon.

JOSH LIPTON: And Ryan, to what extent do you think your data is giving us any insight about the return to office trend and whether that maybe is gaining more traction.

RYAN MASIELLO: Yeah. Look, I mean, that is a number where there's lots of different ways in which people are trying to figure that out. I think that a lot of that data is noisy, and so we do believe that the best way to understand a company-- really, the long-term health of the office market and how hard people are pushing to get back-- is just by looking at the commitments they're making to office leases.

So again, our data tends to lead leasing activity on average by 9:00 months and we have seen a 27% increase in the overall demand that is back in the market this year. So bringing the current demand levels to about 65% of pre-COVID levels. And so I think that's starting to signal that companies are working their way back and are going to start to become long office space once again.

AKIKO FUJITA: Ryan, what lease terms are we talking about right now? I mean, I'd imagine that they are shorter leases given just where demand has been. But also in terms of pricing, how significant a discount are we looking at?

RYAN MASIELLO: Yeah. So this is an interesting one. So what happened post pandemic is a lot of companies wound up signing short term leases. Every lease was about two or three years old. What we have seen now is a lot of companies actually trying to take advantage of what they know is probably the bottom of the market. And so we're starting to see lease terms on average move back up to 5, 7, 10 years.

With respect to rents, on average net effective rents across the core US markets are down about 12%. And obviously that's going to vary depending on the submarket, the building quality, et cetera. But the interesting thing has been-- in this cycle has been flight to quality. So in markets like New York, we're seeing the top 10% of assets actually overachieving their pre-COVID rent levels.

And net effective rents are up about 17%. So those are the earliest signals that I think start to tell us that we're at the bottom of the market. And so for a lot of companies, it is all about trying to figure out how to take advantage of that.

AKIKO FUJITA: Yeah. Up 17% certainly points to a bit of a comeback we're seeing right now. Ryan Masiello, good to talk to you today. Appreciate the time.

RYAN MASIELLO: Thank you.