The July 2023 VTS Office Demand Index Report CRE market data, commercial real estate trends, commercial real estate 2023 market report, VTS, VTS Software, VTS Platform

VTS Office Demand Index (VODI)

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JULY 2023

KEY TAKEAWAYS FROM THIS REPORT

National

As of the end of Q2, the national VODI stood at 53. The VODI’s latest level extends a prolonged stretch of relative stability, suggesting convergence to a post-pandemic state.

Local

While most cities tracked by the VODI reported quarterly and annual declines, San Francisco stood out for seeing a spurt of new demand growth, and New York City’s VODI showed year-over-year growth.

The average VODI gap between the more- and less-remote-friendly cities is one of the largest to-date, likely owing to differing attitudes towards remote work.

16.6%

As of the end of Q2, the national VODI stood at 53. The VODI’s latest level extends a prolonged stretch of relative stability, suggesting convergence to a post-pandemic state.

Explore nationwide trends

Read more local VODI trends

The average VODI gap between the more- and less-remote-friendly cities is one of the largest to-date, likely owing to differing attitudes towards remote work.

Read VODI impacts on local markets

While most cities tracked by the VODI reported quarterly and annual declines, San Francisco stood out for seeing a spurt of new demand growth, and New York City’s VODI showed year-over-year growth.

LOCAL

Most of the cities tracked by the VODI reported quarter-over-quarter declines in new office demand.

SEE MORE NATIONAL TRENDS

LOCAL

Chicago rose from 47 in January to 52 in February, a 10.6% increase. While that increase crosses the 10% mark, it reverts a decline from 50 to 47 in the previous month, adding up to fairly little change.

Boston, on the other hand, has been climbing for two consecutive months, from 28 in December to 34 in January and now 40 in February. This adds up to a more sizable 12-point and 42.9% increase over three months, however, it returns Boston’s VODI to the center of a roughly flat 30-65 band. Boston has been fluctuating in this band since May 2020.

This refers to the average of the VODI cities’ month-over-month changes using absolute values, so that negative and positive fluctuations don’t cancel each other out.

HEADWINDS / TAILWINDS

The office market, summarized in under 2 minutes

Maximilian Saia, VP of Investor Research, is here to walk you through the key trends impacting demand in the office sector for July.

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NATIONAL

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BOSTON

CHICAGO

BOSTON

CHICAGO

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A VODI of 53 indicates that new demand for office space was flowing in at 53 percent of its average level in 2018-2019, i.e. just over half of the pre-pandemic normal. Those years provide a useful benchmark of typical new demand levels as they were right before the COVID-19 pandemic.

The VODI declined 15.9 percent from 63 to 53 quarter-over-quarter from March to June, and it declined an identical 15.9 percent on an annual basis as well. Although the VODI tends to decline modestly between March and June, that decline was more pronounced this year. The national VODI declined 0.9 percent From March to June 2018, and it declined 4.5 percent from March to June in both 2019 and 2022 (2020 and 2021 were abnormal years because of the COVID-19 pandemic, so we do not use them as benchmarks). This year’s 15.9 percent March to June decline is larger than all of those prior benchmarks.

Pre-Pandemic

The Reset

The Crash

Post-Pandemic

The Trough

From January 2018 to March 2020, new office demand fluctuated around a level of 100. In some cities, there was a noticeable downward trend in advance of the pandemic: Chicago, Los Angeles, Seattle; in the other cities the VODI was more ambiguous as to whether it was flat or slightly upward trending.

Pre-Pandemic

In Spring 2020 new office demand fell sharply to the “pandemic low.” Nationally, the VODI fell from 102 in March 2020 to 16 in June 2020, a decline of 84 percent. In some cities the sharp fall was followed by a quick v-shaped rise (New York City and Los Angeles); In others, there was a prolonged u-shaped trough (Washington, San Francisco, Boston, Chicago, and Seattle).

The Crash

From June 2020 through the end of that year, new office demand generally remained very low. In some cities, such as Boston, Chicago and Washington, D.C., the VODI remained more or less flat during this period. In others, such as San Francisco and Seattle, and most notably in New York City and Chicago, this period saw new office demand begin to recover, foreshadowing the phase that was to follow.

The Trough

After vaccines were introduced in early 2021 a sense of return-to-normalcy pervaded. Nationally, the VODI rose from 33 in January 2021 to 85 in June 2021, as demand that had been waiting on the sidelines during The Trough entered the market all at once in a short period. Once that pent-up demand was spent, the VODI quickly subsided from 87 in August 2021 to 61 in October 2021. Although cities whose economies are more remote work-friendly exhibited substantially lower levels of new office demand, all cities experienced a reset.

The Reset

Since October 2021 the VODI has been largely stagnant. Although it has trended downward slightly over the period, it has been almost flat. Nationally, over the entire period since October 2021, the VODI has remained within a narrow range between 46 and 67. With work-from-home levels remaining persistently elevated, the VODI appears to have settled into a Post-Pandemic state.

Post-Pandemic

What trends might be influencing post-pandemic demand for office space?

Economic and social impacts on VODI

Both persistent work-from-home and lingering economic uncertainty are keeping VODI growth subdued.

A stabilized balance of on- and off-site work:

Three years ago, in the depths of the pandemic, and even two years ago, as many facets of life and work were returning to normalcy, it was not clear to what extent the elevated levels of off-site work, a.k.a work-from-home, would persist. Since then, announcements and delays of anticipated returns to the office have given way to a slow-moving tug of war between employers and employees around how often workers must show up on-site. In other words, we are not seeing employers prepare for a return to office en masse. Data from WFH Research, a group that includes Stanford University, indicates the share of workdays worked off-site (across all lines of work, including non-office-using sectors) has stabilized at about one-third since spring 2022 (note that the chart shows a 6-month trailing average so, e.g., the data point for October 2022 reflects May-October 2022).

At least anecdotally, the norms around on- and off-site work are coalescing differently by industry, with the TAMI sector more welcoming of off-site work than, e.g., the FIRE and government sectors. While the current balance of on- and off-site work has been relatively stable, its durability will remain an important factor influencing office demand. The post-pandemic period has been an economically tumultuous one. The resulting uncertainty generally pushes employers to delay making consequential decisions, like leasing multi-year office space. That has probably acted as a damper on office demand since the pandemic, and is likely to continue. Office-using employment growth, which declined from late 2021 to early 2023, has pivoted and begun to rise slightly.

SEE LOCAL TRENDS

NEW YORK CITY

SAN FRANCISCO

San Francisco stood out for seeing a spurt of new demand growth, as indicated by 10.2 percent quarter-over-quarter growth and 5.9 percent year-over-year growth. Since March, San Francisco has experienced an increase in the number of new prospective tenants seeking large spaces greater than 50,000 square feet. In New York City, the VODI was almost unchanged over the quarter, down just 3.9 percent. Year-over-year, New York City’s VODI increased by 7.4 percent – the most of any VODI market. In recent months, New York City has experienced a heightened influx of new prospective tenants seeking large spaces. And as New York City’s office market is disproportionately large, its relative strength has exerted outsized influence on the national VODI. Los Angeles experienced only a modest quarterly decline. On an annual basis, its VODI fell more significantly, 23.3 percent, but that decline is owed to a brief peak almost exactly a year ago. Current strikes in the movie industry could weaken the Los Angeles TAMI market. Chicago and Seattle reported quarterly VODI declines in excess of 20 percent, and annual VODI declines in excess of 30 percent. Whereas the national VODI has remained essentially flat since late 2021 (despite showing a moderate decline because of the timing of fluctuations), Chicago and Seattle’s VODIs both peaked in mid-2021 and have since then demonstrated almost continuous decline. Washington, D.C. experienced one of the most precipitous declines in new office demand, with its VODI decreasing by 44.6 percent quarter-over-quarter and 41.9 percent year-over-year – the largest annual decline. In fact, the June VODI for Washington, D.C., is its lowest since January 2021, when it was first emerging from its lockdown-driven pandemic low. Washington’s sharp decline over the last three months is owed largely to a dearth of prospective tenants seeking large spaces, greater than 50,000 square feet. The greatest quarterly decline was 50.9 percent in Boston, but is owed to temporary volatility as Boston’s VODI peaked briefly 3 months earlier. Boston’s year-over-year decline was also substantial at 39.1 percent, but is similarly an artifact of that market’s volatility, owing to a short-lived burst of new demand that peaked in May 2022.

SEE MORE LOCAL TRENDS

The terms more- and less-remote friendly come from the fact that a greater share of the workforce performs work that can potentially be done remotely in the more-remote-friendly group of cities. However, while that might explain why the more-remote-friendly cities have a bigger fraction of workers in the office-using sector, it doesn’t explain why the demand for office space has fared differently within each group’s office-using sector. A possible explanation is that the more-remote-friendly cities’ office-using sectors consist of industries (or culture) that have been more amenable to remote work, and therefore seen a greater reduction in new office demand versus pre-pandemic levels, as reflected by lower VODI levels. For example, the prevalence of the TAMI sector in San Francisco, which is anecdotally more amenable to remote work and employee benefits than some others, contrasts with the prevalence of the less amenable FIRE sector in New York City. As we continue to discover how the Post-Pandemic plays out, it remains to be seen how different sectors’ market use will evolve.

As of the end of Q2, the average VODI of the so-called more-remote-friendly cities (Boston, San Francisco, Seattle, and Washington, D.C.) was 32.4 percent lower than that of the less-remotely-friendly cities (Chicago, Los Angeles, and New York City). The gap increased by 17.5 percentage points from 14.9 percent a quarter ago to 32.4 percent at the end of Q2. Looking over an extended period, that gap first formed in September 2020 and has been a consistent feature of the VODI landscape since then. With the exception of October 2021 and November 2022, when the gap was briefly even greater, June’s gap is the largest to date.

NATIONAL

LOCAL

Both persistent work-from-home and lingering economic uncertainty are making employers more hesitant to take on new leases, and keeping VODI growth subdued.

The economic outlook:

Looking forward, even with remote work more prevalent than before the pandemic, it seems plausible that an improved economic outlook and reduced uncertainty would send more employers back into the market for office space. While a positive economic trajectory of that type may not undo work-from-home, it could certainly generate meaningful new need for office space.

However, despite registering quarterly and annual declines, the VODI has remained fairly stable. At 53, the June VODI exceeds 7 of the past 12 monthly readings. Over the last year, the VODI has remained within a relatively narrow range from 46 to 64. In fact, the VODI’s latest level extends the current stretch of relative stability, which has been ongoing since October 2021. Since then, the VODI has remained in only a slightly wider range of 46 to 67. In past reports, this stretch of stability has been referred to as The Stagnation. Now, this period will be referred to as Post-Pandemic.

VTS is the leading provider of leasing, marketing, asset management, and tenant experience software for commercial real estate landlords, with market share averaging over 80% in core U.S. office markets. The VTS platform captures, aggregates, and anonymizes supply and demand data across all office asset classes and age segments. Due to VTS’ market share and the multiple spaces considered by tenants in a given search, VTS sees 99% of all newly created tenant requirements within the markets it serves. With this unprecedented view, VTS has developed an index, the VTS Office Demand Index, published monthly, to provide landlords, brokers, tenants, and the business community with visibility into a previously opaque segment of the market: real-time tenant demand in the US office leasing market. The VTS Office Demand Index (VODI) is the earliest look into the health of the office market. The VODI, as an index capturing actual market actions of potential tenants - promises to be a source of greater certainty and the first to actually capture the demand for office space as it evolves during this critical period. The VODI reflects the total square footage of unique tenant requirements surfaced by touring activity in a given month relative to the total square footage observed in VTS’ expansive network of leasing, marketing, and asset management software. Accounting for the total square footage observed helps distinguish changes in the demand for office space from the growth of VTS’ reach, as well as from changes in the supply of office space, e.g. due to fluctuation in vacancy rates or new construction. To enhance its interpretation and its comparability across regions, VODI is reported as an indexed value using the 2018-2019 average level as a baseline valued at 100. The index is not seasonally adjusted, but it is smoothed using a 3-month trailing average. To ensure the viability of VTS data for market insight, VTS suppresses monthly VODI data points informed by less than four customers, as well as all data aggregated prior to January 2018. The markets referred to in this report correspond to the named cities, not metropolitan areas. The VODI report includes analysis and commentary from MetroSight.

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VTS Office Demand Index (VODI)

LAUREN RIEFFLIN Kingston Marketing Group lauren@kingstonmarketing.group ERIC JOHNSON VTS eric.johnson@vts.com

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JULY 2023

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Changes to the VODI Report

VTS has shifted the cadence of the VODI report from monthly to quarterly and is retiring its standalone Greenshoots Report. The March 2023 VODI report was the final monthly report. The quarterly VODI report will be published in January, April, July, and October capturing data and findings from VTS over a three-month (quarterly) period moving forward. The quarterly VODI report will include select data points from the former VTS Greenshoots report, providing all your need-to-know trends and takeaways for the office market in one comprehensive report. For questions, data inquiries or to connect with a VTS spokesperson, contact eric.johnson@vts.com.