Warning sign for downtown? Seattle sees biggest drop in demand for office space

In downtown Seattle, crews are putting the finishing touches on a striking new skyscraper. Standing roughly 850 feet tall, the Rainier Square Tower has already redrawn the city’s skyline as its second-tallest building.

But there’s a lingering question for this — and any — new Seattle office space: Will it ever be filled with workers?

As in every other city, remote work has left Seattle’s office buildings largely unoccupied since the beginning of the pandemic. Thankfully, with the vaccine rollout underway, an end may be in sight. But there’s a troubling sign that Seattle’s office buildings — and consequently its downtown — may not bounce back as quickly as some other major markets.

It’s also something of a paradox, because Seattle’s economy is humming along. New data from the Bureau of Labor Statistics shows that Seattle stands out for its recovery in employment among workers who typically work in offices.

In most major markets, the number of workers employed in office jobs was off in December when compared with February, which was just before the pandemic turned everything upside down. But in Seattle, the number of workers in office jobs is actually up by a little over 1%.

So you might think that local companies would once again be eyeing new office space, envisioning a return to normalcy in the not-too-distant future. But that doesn’t appear to be happening.

In fact, interest in leasing new office space has fallen furthest from pre-pandemic levels in Seattle when compared with other major markets. That’s according to a new report from New York-based VTS, which provides leasing and asset management software for commercial real estate landlords.

VTS produces a monthly index number that gauges the interest among companies for new office space. An index score of 100 indicates a typical level of demand for the past several years (the index was first produced in 2018).

In February, Seattle had an index score of 86. By December, it had fallen to 17. That’s an 80% drop, which is the largest among the seven markets included in the study.

The VTS index represents a novel way to measure demand for office space. Traditionally, that demand would be captured at the point where a company signs a lease or moves into a space. Instead, VTS looks at the number of office-space tours by potential tenants.

Tours are important because that’s how a company first engages the market, says Eli Gilbert, head of market research for VTS.

“The tenant goes out with a broker, just like you’re buying a house, and you go to multiple different buildings,” Gilbert says. “That’s the point we’re capturing within the VTS system.”

Because the data captures a much earlier point in the office-space leasing process, Gilbert believes that the VTS index is the most leading indicator of tenant behaviors. He says the system is able to capture nearly 100% of tenants coming into a market.

While social distancing guidelines initially had some negative impact on tours, the industry has become more comfortable navigating in-person interactions, Gilbert says. The VTS data also tracks virtual tours.

So the question remains, as we (let’s hope) move into the homestretch of the pandemic, why is the interest in office space down so dramatically in Seattle, even as office-job employment is up — and is that a portent of doom for our downtown?

At this point, we can’t really know. It could simply represent a brief lag between the hiring of new workers and the leasing of office space. Perhaps the interest in office space will pick up in the coming months.

But it could also be a sign of a more fundamental shift toward remote work in the Seattle area — more so here than in most other markets. And for that, you can thank (or blame, depending on your perspective) our dominant industry: Tech.

“Markets or cities that have a much higher percentage of technology tenants are probably the most comfortable with working from home,” Gilbert says. “These companies’ plans to return to the office may be delayed as they plan out the next few years in this post-COVID environment.”

Tech companies, by their very nature, have the most well-developed remote-work infrastructure, and the largely younger work force is more comfortable with this type of work arrangement.

“You can give kid a laptop and a set of headphones and they’ll work from Starbucks for the rest of their life,” Gilbert said.

By contrast, the culture of law firms or financial services, for example, is much more face-to-face. And a physical office space plays a more significant role in the life of a lawyer than it does a tech worker, Gilbert says.

With its mostly empty office towers, downtown Seattle today is not the place it was a year ago. There are only a fraction of the workers, shoppers and visitors there once were. While it’s too soon to know how many of the disruptions caused by the pandemic will be long-term or even permanent after the coronavirus is contained, surely there are tremendous challenges ahead.

But for any city to thrive, it needs a healthy core — and it’s not too soon for our city leaders to be thinking about what steps we can take to help Seattle’s downtown rebound in a post-pandemic world.