VTS Office
Demand Index
(VODI)
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MONTHLY REPORT
March 2023
KEY TAKEAWAYS FROM THIS REPORT
National
4.3%
VODI increased 4.3% from January to February, falling short of the typical February upswing. This is also down 12.7% on an annual basis.
Local
NEXT
10%
February 2023 was the least volatile February on record, with 5 of the 7 cities tracked by VODI experiencing relatively small swings of less than 10%.
Only Chicago and Boston had greater upswings.
NEXT
The prospects of a sharp return to office appear to be vanishing. Instead, a protracted and likely partial return to office is underway.
Economic uncertainty amidst rising interest rates and a cooling job market continued to inhibit prospective tenants in February.
New York City’s Trophy and Class A share is up
5.6 percentage points from a year ago, suggesting a new demarcation between the winning and losing spaces of the post-pandemic office arena.
5.6%
The nationwide VODI increased 4.3% from January to February, but falls short of typical upswing, and remains down 12.7% on an annual basis.
Explore nationwide trends
February 2023 falls short of a typical February, and tracks down when compared year-over-year.
Coming in at 48, the VODI increased slightly in February compared to its prior reading of 46 in both January 2023 and December 2022.
On an annual basis, the VODI is down 12.7% from a level of 55 in February 2022.
NATIONAL
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How the economy impacts VODI
The prospects of a sharp return to office appear to be vanishing and economic uncertainty amidst rising interest rates inhibits prospective tenants.
Read more New York City VODI trends
New York City’s Trophy and Class A share of tours is up 5.6% from a year ago, suggesting a new demarcation between the winning and losing spaces of the post-pandemic office arena.
Read VODI impacts on local markets
This February was the least volatile February on record. Five of the 7 cities tracked by the VODI are experiencing relatively small swings of less than 10%.
LOCAL
LOCAL
Chicago and Boston were the only markets that experienced swings greater than 10%.
As far as local VODIs are concerned, February was mild. This month’s average month-over-month (MoM) change across cities was the smallest on record.
While the average MoM change for cities has been greater than 10% every February since 2018, it was only 7.6% in February 2023.
NEXT
NATIONAL
February is typically the first month of the spring upswing in new office demand. In 2018, 2019, and 2020, the February VODI grew by 5.5%, 10.3%, and 8.3%, respectively. In 2020, this demand came just before the COVID-19 pandemic hit the U.S.
This February, the VODI month-over-month growth was 4.3%, falling slightly short of the lowest recorded February (2018).
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This latest inching upwards extends a spell of uncharacteristic stability. Since it fell from 63 to 52 between June and July last year, the VODI has stayed relatively stable, trapped between 46 and 55.
NATIONAL
There is no certainty that the March 2023 VODI growth will match those levels, the odds are good that it will exceed February growth as March typically sees greater VODI numbers than February, as demonstrated above. This is also possible because demand is pushed forward from February to show up in March.
Additionally, February is the shortest month of the year, and in several VODI markets, it came with a harsher winter than usual in 2023.
March is typically the peak of the spring upswing. While March in 2020, 2021, and 2022 were irregular because of the pandemic, March 2018 and 2019 saw the national VODI grow by 16.7% and 27.9%, respectively.
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SEE MORE NATIONAL TRENDS
NATIONAL
Rather than a total return to office, the market is seeing a protracted return, that will likely result in a partial return to office.
With a cooling job market, rising interest rates, and economic uncertainty, February saw that prospective tenants were inhibited.
February’s VODI further extends a period of slow decline since October 2022. We refer to this period as stagnation.
At present, the prolonged stagnation appears to be driven by the state of the economy and the slowly reverting balance of remote versus on-site work.
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.
Read more
Pre-Pandemic
Post-Vaccine Wave
The Crash
The Setback
The Trough
The Stagnation
Read more
Pre-Pandemic
After vaccines were introduced in early 2021 and administered to a fast-growing share of the adult population each month, a sense of return-to-normalcy pervaded in spring 2021. Nationally, the VODI rose from 33 in January 2021 to 85 in June 2021 and then plateaued from June to August 2021. The city-specific VODIs behaved similarly, but differed in whether they had a sharp peak or a flat one spread over a few months. Cities also differed in the height that the VODI reached at this stage, with cities whose economies are more remote work-friendly exhibiting substantially lower levels of new office demand.
Post-Vaccine Wave
Read more
Read more
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
In August 2021 the VODI began falling sharply again, until October. It was a more limited drop than “the crash” in spring 2020, taking the national VODI from 87 in August 2021 to 61 in October 2021 (down 30%), but it was sharp nonetheless. The data at hand do not allow us to disentangle the causes, but the timing suggests that two factors were at play:
The Setback
Read more
Read more
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
Despite some seasonal buoyancy in March 2022, the VODI has been on a downward trend since October 2021. Nationally, since October 2021 the VODI has ranged from a high of 67 (May ‘22) to a low of 46 (January ‘23). The city-specific VODIs have essentially done the same, despite more pronounced fluctuations, especially in July. New office demand during this period has been stalled by concerns over new COVID variants, a shifting balance between remote and on-site work, and more recently by concerns around economic uncertainty. It now appears to be gradually settling into a new, post-pandemic normal dictated by a post-pandemic, expanded work-from-home reality.
The Stagnation
(i) pent-up demand that was waiting for pandemic conditions to improve and/or uncertainty to ease before introducing new requirements likely fueled the initial post-vaccine wave, and may have been spent by at this point;
(ii) the emergence of the delta variant reignited concerns around COVID-19 and elevated the degree of uncertainty, causing potential new demand to stay on the sidelines. The gap between the more and less remote work friendly groups of cities remained intact throughout the setback stage. Finally, the setback occurred in Washington, D.C., sooner than it did in any other market.
NATIONAL
Let’s address the economy first. Though economic uncertainty has been elevated for years — from COVID variants and supply chain issues to war in Europe to spiking inflation — this uncertainty has yet to lapse, as rising interest rates now increasingly threaten a recession.
NATIONAL
Headline employment remains low, giving the Federal Reserve cover to further increase interest rates. However, other labor market measures indicate substantial cooling.
Office-using employment growth has been steadily falling and is almost down to zero. And while forward-looking job postings are still elevated, relative to pre-pandemic levels, decline is continuing and has become even more pronounced since the beginning of 2023.
NATIONAL
As described in last month’s VODI report, reverting to in-office work is underway but has been slow, and the trend to in-office has made very partial gains.
Although the coordinated shift to mass remote work during the early pandemic was phenomenally sharp due to public health and safety mandates, its reversal has repeatedly dashed hopes of a large, sharp wave of return-to-office.
In fact, return-to-office pace has been less pronounced in the U.S. than elsewhere in the world, likely due to America’s large homes, long commutes, and tight labor market.
NATIONAL
At this point, remaining predictions of a sharp, event-driven reversion to
on-site work seem less credible as the likely path appears to be one of gradually increasing rates of on-site work. While this may stabilize to
pre-pandemic levels, return-to-office trends do not solely determine new demand for office space. However, these trends are influential, and it remains to be seen how this plays out when it comes to the VODI.
The mixture of economic uncertainty and market cooling, as well as vanishing prospects of a significant return to office, likely continued to inhibit prospective tenants from starting new office searches in February.
These cooling economic conditions do offer a silver lining for office demand. Return-to-office dynamics are not detached from the labor market. A reduction in labor hurts employee bargaining power, which tends to support on-site work and, therefore, office demand.
As corporate belts tighten, greater scrutiny of productivity can motivate a return to
on-site work.
EXPLORE LOCAL TRENDS
LOCAL
In contrast, the average monthly change in the local VODIs in February 2018 was more than twice as high as it is now, recorded at 16.9%.
In February 2021, during the post-vaccine wave, in which office demand emerged from its early pandemic depths, it was 32.9%.
Five of the 7 cities recorded by the VODI experienced swings in February that exceeded 10%. This was also the case in January, consistent with an extended stretch of stability. The exceptions were Chicago and Boston.
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.
LOCAL
1
1
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.
LOCAL
Not all spaces were created the same and some are far more prestigious and/or better located than others.
When demand for offices weakens, it is the demand for Trophy and Class A spaces that tend to be the most resilient.
From the investor’s perspective, this phenomenon is known as
flight-to-quality.
When the pandemic struck NYC in 2020, the share of tours corresponding to Trophy and Class A spaces spiked from 76.8% in January to 90.9% in May. This was despite tour activity halting in April 2020, when several hundred typical monthly tours collapsed to just four that month. Those four tours were for Trophy and Class A spaces.
Since the peak, the share of New York City tours in Trophy and Class A fell gradually until early 2022. In February of that year, the three-month average of that share hit 76%.
Remarkably, this share has begun rising again. In October 2022, the three-month trailing average crossed 80% once again and has remained above ever since. The reading in February 2023 was 81.6% — a 5.6 percentage point increase from a year ago.
LOCAL
A possible interpretation of this rise in Trophy and Class A tour shares is that there is a diverging of prospects into different types
of office space.
In a world where office use remains reduced relative to pre-pandemic levels (even in New York City), there are spaces whose viability as offices is questionable. Those are predominantly Class B and C spaces and are especially prominent when these assets are in less appealing locations.
In some cases, these spaces may convert to other uses — which is sometimes difficult to do — and they will remain in tenancy and/or land-use limbo for the foreseeable future.
LOCAL
Trophy and Class A spaces, on the other hand, remain in demand despite employees wanting to work from home. A rising Trophy and Class A share of tours could reflect recognition of these trends on the part of prospective tenants.
VTS has recorded 22 executed deals year-to-date in 2023, 41% of those deals were concentrated in Trophy assets, and 55% were located in buildings built or renovated in 2018 or later.
LOCAL
Post-pandemic, tenants are demanding the best spaces.
The past year’s rise in Trophy and Class A tour share suggests a new demarcation may be forming between the winning and losing spaces in the post-pandemic office arena.
If this is the case, tour share is likely to remain elevated for a while
to come.
HEADWINDS / TAILWINDS
The Office Market, Summarized in 60 Seconds
Maximilian Saia, Senior Director of Investor Research at VTS, is here to walk you through the key trends impacting demand in the office sector for March.
READ THE FULL VODI REPORT
NATIONAL
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See VODI Methodology
Get a pulse on what’s happening in the market today.
Learn more about VTS Data
SEE MORE NATIONAL TRENDS
BOSTON
CHICAGO
BOSTON
CHICAGO
SEE BOSTON'S VODI
NATIONAL
NATIONAL
NATIONAL
NATIONAL
NATIONAL
NATIONAL
NATIONAL
Jan '18
Mar '20
Jun '20
Jan '21
Aug '21
Oct '21
Feb '23
New Demand for Office Space
Over the Pandemic: An Illustration
NATIONAL
NATIONAL
NATIONAL
NATIONAL
SEE LOCAL TRENDS
LOCAL
LOCAL
LOCAL
LOCAL
SEE MORE LOCAL TRENDS
LOCAL
LOCAL
LOCAL
LOCAL
LOCAL
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VIEW FULLSCREEN
VTS Office
Demand Index
(VODI)
MONTHLY REPORT
March 2023
READ THE FULL VODI REPORT
Maximilian Saia, Senior Director of Investor Research at VTS, is here to walk you through the key trends impacting demand in the office sector for March.
The Office Market, Summarized in 60 Seconds
National
Local
KEY TAKEAWAYS FROM THIS REPORT
VODI increased 4.3% from January to February, falling short of the typical February upswing. This is also down 12.7% on an annual basis.
NEXT
4.3%
The prospects of a sharp return to office appear to be vanishing. Instead, a protracted and likely partial return to office is underway.
Economic uncertainty amidst rising interest rates and a cooling job market continued to inhibit prospective tenants in February.
10%
February 2023 was the least volatile February on record, with 5 of the 7 cities tracked by VODI experiencing relatively small swings of less than 10%.
Only Chicago and Boston had greater upswings.
NEXT
New York City’s Trophy and Class A share is up
5.6 percentage points from a year ago, suggesting a new demarcation between the winning and losing spaces of the post-pandemic office arena.
5.6%
Get a pulse on what’s happening in the market today.
See VODI Methodology
Learn more about VTS Data
METHODOLOGY
How the economy impacts VODI
The prospects of a sharp return to office appear to be vanishing and economic uncertainty amidst rising interest rates inhibits prospective tenants.
NATIONAL
Rather than a total return to office, the market is seeing a protracted return, that will likely result in a partial return to office.
With a cooling job market, rising interest rates, and economic uncertainty, February saw that prospective tenants were inhibited.
February’s VODI further extends a period of slow decline since October 2022. We refer to this period as stagnation.
At present, the prolonged stagnation appears to be driven by the state of the economy and the slowly reverting balance of remote versus on-site work.
NATIONAL
Read more
Pre-Pandemic
Read more
The Crash
Read more
The Trough
Read more
Post-Vaccine Wave
Read more
The Setback
Read more
The Stagnation
Jan '18
Mar '20
Jun '20
Jan '21
Aug '21
Oct '21
Feb '23
New Demand for Office Space
Over the Pandemic: An Illustration
NATIONAL
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 and administered to a fast-growing share of the adult population each month, a sense of return-to-normalcy pervaded in spring 2021. Nationally, the VODI rose from 33 in January 2021 to 85 in June 2021 and then plateaued from June to August 2021. The city-specific VODIs behaved similarly, but differed in whether they had a sharp peak or a flat one spread over a few months. Cities also differed in the height that the VODI reached at this stage, with cities whose economies are more remote work-friendly exhibiting substantially lower levels of new office demand.
Post-Vaccine Wave
In August 2021 the VODI began falling sharply again, until October. It was a more limited drop than “the crash” in spring 2020, taking the national VODI from 87 in August 2021 to 61 in October 2021 (down 30%), but it was sharp nonetheless. The data at hand do not allow us to disentangle the causes, but the timing suggests that two factors were at play:
(i) pent-up demand that was waiting for pandemic conditions to improve and/or uncertainty to ease before introducing new requirements likely fueled the initial post-vaccine wave, and may have been spent by at this point;
(ii) the emergence of the delta variant reignited concerns around COVID-19 and elevated the degree of uncertainty, causing potential new demand to stay on the sidelines. The gap between the more and less remote work friendly groups of cities remained intact throughout the setback stage. Finally, the setback occurred in Washington, D.C., sooner than it did in any other market.
The Setback
Despite some seasonal buoyancy in March 2022, the VODI has been on a downward trend since October 2021. Nationally, since October 2021 the VODI has ranged from a high of 67 (May ‘22) to a low of 46 (January ‘23). The city-specific VODIs have essentially done the same, despite more pronounced fluctuations, especially in July. New office demand during this period has been stalled by concerns over new COVID variants, a shifting balance between remote and on-site work, and more recently by concerns around economic uncertainty. It now appears to be gradually settling into a new, post-pandemic normal dictated by a post-pandemic, expanded work-from-home reality.
The Stagnation
NATIONAL
Let’s address the economy first. Though economic uncertainty has been elevated for years — from COVID variants and supply chain issues to war in Europe to spiking inflation — this uncertainty has yet to lapse, as rising interest rates now increasingly threaten a recession.
NATIONAL
Headline employment remains low, giving the Federal Reserve cover to further increase interest rates. However, other labor market measures indicate substantial cooling.
Office-using employment growth has been steadily falling and is almost down to zero. And while forward-looking job postings are still elevated, relative to pre-pandemic levels, decline is continuing and has become even more pronounced since the beginning of 2023.
NATIONAL
As described in last month’s VODI report, reverting to in-office work is underway but has been slow, and the trend to in-office has made very partial gains.
Although the coordinated shift to mass remote work during the early pandemic was phenomenally sharp due to public health and safety mandates, its reversal has repeatedly dashed hopes of a large, sharp wave of return-to-office.
In fact, return-to-office pace has been less pronounced in the U.S. than elsewhere in the world, likely due to America’s large homes, long commutes, and tight labor market.
NATIONAL
At this point, remaining predictions of a sharp, event-driven reversion to
on-site work seem less credible as the likely path appears to be one of gradually increasing rates of on-site work. While this may stabilize to
pre-pandemic levels, return-to-office trends do not solely determine new demand for office space. However, these trends are influential, and it remains to be seen how this plays out when it comes to the VODI.
The mixture of economic uncertainty and market cooling, as well as vanishing prospects of a significant return to office, likely continued to inhibit prospective tenants from starting new office searches in February.
These cooling economic conditions do offer a silver lining for office demand. Return-to-office dynamics are not detached from the labor market. A reduction in labor hurts employee bargaining power, which tends to support on-site work and, therefore, office demand.
As corporate belts tighten, greater scrutiny of productivity can motivate a return to
on-site work.
SEE LOCAL TRENDS
Explore nationwide trends
The nationwide VODI increased 4.3% from January to February, but falls short of typical upswing, and remains down 12.7% on an annual basis.
NATIONAL
NATIONAL
February 2023 falls short of a typical February, and tracks down when compared year-over-year.
Coming in at 48, the VODI increased slightly in February compared to its prior reading of 46 in both January 2023 and December 2022.
On an annual basis, the VODI is down 12.7% from a level of 55 in February 2022.
NATIONAL
February is typically the first month of the spring upswing in new office demand. In 2018, 2019, and 2020, the February VODI grew by 5.5%, 10.3%, and 8.3%, respectively. In 2020, this demand came just before the COVID-19 pandemic hit the U.S.
This February, the VODI month-over-month growth was 4.3%, falling slightly short of the lowest recorded February (2018).
This latest inching upwards extends a spell of uncharacteristic stability. Since it fell from 63 to 52 between June and July last year, the VODI has stayed relatively stable, trapped between 46 and 55.
NATIONAL
There is no certainty that the March 2023 VODI growth will match those levels, the odds are good that it will exceed February growth as March typically sees greater VODI numbers than February, as demonstrated above. This is also possible because demand is pushed forward from February to show up in March.
Additionally, February is the shortest month of the year, and in several VODI markets, it came with a harsher winter than usual in 2023.
March is typically the peak of the spring upswing. While March in 2020, 2021, and 2022 were irregular because of the pandemic, March 2018 and 2019 saw the national VODI grow by 16.7% and 27.9%, respectively.
SEE MORE NATIONAL TRENDS
Read more New York City VODI trends
New York City’s Trophy and Class A share of tours is up 5.6% from a year ago, suggesting a new demarcation between the winning and losing spaces of the post-pandemic office arena.
LOCAL
Not all spaces were created the same and some are far more prestigious and/or better located than others.
When demand for offices weakens, it is the demand for Trophy and Class A spaces that tend to be the most resilient.
From the investor’s perspective, this phenomenon is known as
flight-to-quality.
LOCAL
When the pandemic struck NYC in 2020, the share of tours corresponding to Trophy and Class A spaces spiked from 76.8% in January to 90.9% in May. This was despite tour activity halting in April 2020, when several hundred typical monthly tours collapsed to just four that month. Those four tours were for Trophy and Class A spaces.
Since the peak, the share of New York City tours in Trophy and Class A fell gradually until early 2022. In February of that year, the three-month average of that share hit 76%.
Remarkably, this share has begun rising again. In October 2022, the three-month trailing average crossed 80% once again and has remained above ever since. The reading in February 2023 was 81.6% — a 5.6 percentage point increase from a year ago.
LOCAL
A possible interpretation of this rise in Trophy and Class A tour shares is that there is a diverging of prospects into different types
of office space.
In a world where office use remains reduced relative to pre-pandemic levels (even in New York City), there are spaces whose viability as offices is questionable. Those are predominantly Class B and C spaces and are especially prominent when these assets are in less appealing locations.
In some cases, these spaces may convert to other uses — which is sometimes difficult to do — and they will remain in tenancy and/or land-use limbo for the foreseeable future.
LOCAL
Trophy and Class A spaces, on the other hand, remain in demand despite employees wanting to work from home. A rising Trophy and Class A share of tours could reflect recognition of these trends on the part of prospective tenants.
VTS has recorded 22 executed deals year-to-date in 2023, 41% of those deals were concentrated in Trophy assets, and 55% were located in buildings built or renovated in 2018 or later.
LOCAL
Post-pandemic, tenants are demanding the best spaces.
The past year’s rise in Trophy and Class A tour share suggests a new demarcation may be forming between the winning and losing spaces in the post-pandemic office arena.
If this is the case, tour share is likely to remain elevated for a while to come.
Read VODI impacts on local markets
This February was the least volatile February on record. Five of the 7 cities tracked by the VODI are experiencing relatively small swings of less than 10%.
LOCAL
LOCAL
Chicago and Boston were the only markets that experienced swings greater than 10%.
As far as local VODIs are concerned, February was mild. This month’s average month-over-month (MoM) change across cities was the smallest on record.
While the average MoM change for cities has been greater than 10% every February since 2018, it was only 7.6% in February 2023.
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.
1
1
LOCAL
In contrast, the average monthly change in the local VODIs in February 2018 was more than twice as high as it is now, recorded at 16.9%.
In February 2021, during the post-vaccine wave, in which office demand emerged from its early pandemic depths, it was 32.9%.
Five of the 7 cities recorded by the VODI experienced swings in February that exceeded 10%. This was also the case in January, consistent with an extended stretch of stability. The exceptions were Chicago and Boston.
LOCAL
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.
SEE MORE LOCAL TRENDS
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.
SEE BOSTON'S VODI
BOSTON
BOSTON
CHICAGO
CHICAGO
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