VTS Office
Demand Index
(VODI)
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OCTOBER 2023
KEY TAKEAWAYS FROM THIS REPORT
National
53
The national VODI stood at 51 in September, marking two years in which new demand for office space has remained in a narrow band between about half and two-thirds of its average pre-pandemic level. After two years at nearly the same rate we are confident that, barring any unexpected changes, office demand will continue to stabilize at this level for the foreseeable future.
Local
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From a longer-term perspective, Chicago, Seattle, and Washington, D.C. have seen their VODIs gradually decline over the last two years.
New York City, Los Angeles,
San Francisco, and Boston have remained roughly flat over that period, though at very
different levels.
16.6%
The national VODI stood at 51 in September, marking two years in which new demand for office space has remained in a narrow band between about half and two-thirds of its average pre-pandemic level. After two years at nearly the same rate we are confident that, barring any unexpected changes, office demand will continue to stabilize at this level for the foreseeable future.
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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 October.
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NATIONAL
METHODOLOGY
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In September, the national VODI was 51. That level is 2 VODI points lower than it was one quarter ago, in June, and 3 VODI points higher than it was a year ago.
For 24 consecutive months, new demand for office space has remained within a relatively narrow band between 46 and 67. Because the VODI is calibrated such that the average level of new demand in 2018 and 2019 equals 100, those levels mean that new demand for office space has been hovering between about half and two thirds of its recent pre-pandemic level in those years.
Seeing as the period in which the VODI has remained in that narrow band has now reached the two-year mark, it seems fair to assume that demand will stabilize around this level for the immediate future. Even if this new period ultimately proves to be temporary, it will have been that way for a significant length of time and, based on persistently prevalent work-from-home rates and declining office-using employment, we don’t see it markedly changing any time soon.
While the VODI has remained fairly stable for the past 24 months, its average trend over this period is one of slow decline. From a quantitative approach, the relative stability of the VODI shows up in smaller monthly and quarterly mean absolute percent changes during the last 24 months than in 2018-2019.¹
The slow decline is measurable, too. Fitting a trend line to the VODI’s fluctuations indicates it has been declining at an average pace of approximately 0.4 VODI points per month – i.e. about 5 VODI points per year – from Oct 2021 to Sep 2023. For the VODI to increase back to 100 or decline to 0 at a pace of 5 VODI points per year would take about 10 years.
We refer to the VODI’s 24-month-and-counting stretch of relative stability and slight decline as The Stagnation, or the new normal.
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Pre-Pandemic
The Reset
The Crash
The Stagnation (The New Normal)
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 D.C.,
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.
The Stagnation (The New Normal)
At the time of writing, the Federal Reserve is sticking to its “higher for longer” line with respect to interest rates, and the labor market is cooler than it has been. After a brief pause in spring, office-using employment growth across VODI cities is once again declining, and has turned negative, meaning that it is actually slightly shrinking.
Economic and social impacts on VODI
A cooling job market and work-from-home that remains persistently prevalent are both tempering the demand for office space.
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NATIONAL
A cooling job market and work-from-home that remains persistently prevalent are both tempering the demand for office space.
REPORT
On a quarterly basis, Seattle experienced the most notable VODI decline, while
Los Angeles experienced the most notable short-term increase over the period.
In September the gap between the so-called remote-friendly cities’ VODIs and the others’ was the widest it has been
to date.
16.6%
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¹ The mean quarterly absolute percent change during 2018-2019 was 20.13 percent, and from Oct 2021 to Sep 2023 it was 15.57 percent. In monthly terms, the mean absolute percent change during 2018-2019 was 9.54 percent, and from Oct 2021 to Sep 2023 it was 8.76 percent.
At the same time, job postings, which are a more leading measure of the state of the labor market and which have declined considerably since peaking in December 2021, have yet to show even a slight rebound.
WFH rates are no longer declining and are, in fact, on the rise. According to WFH Research the share of workdays worked remotely across all industries (including non-office based ones) in the 10 largest US metros bottomed out at 32.7 percent in November 2022, and has since been rising. As of August 2023 it stood at 34.3 percent.
In other words, the “return-to-office” seems to have ended or at least paused. This flat-lining of work-from-home levels seems to be a feature of the new normal.
Notably, the level of work-from-home appears to be stable or slightly rising in spite of a cooling job market which would typically provide employers more bargaining power to get employees back into the office, but per the data, hasn’t. This suggests current work-from-home rates are likely a long-term fixture.
In the current environment of a cooling labor market and prevalent work-from-home, employers are likely to need less new office space, if any. That adds on to any latent demand that employers may be holding back on as a result of economic uncertainty. This is the state of affairs behind the
new normal.
Read VODI impacts on local markets
On a quarterly basis, Seattle experienced the most notable VODI decline, while Los Angeles experienced the most notable short-term increase over the period.
LOCAL
At 74, the Los Angeles VODI was 32.1 percent above its level of 56 three months ago, and up 19.4 percent year-over-year. With the exception of a short-lived spike in May 2022, the current reading is Los Angeles’ highest since the Post-Vaccine Wave in the Summer of 2021, when the city’s VODI briefly surpassed 100.
At 74, the Los Angeles VODI is also the highest VODI among all cities reported. The city’s VODI growth owes primarily to a spike in tenants seeking large spaces, greater than 50,000 square feet. New demand for spaces of that size in Los Angeles is now higher than at any time since June 2021. While the WGA strikes may have hurt demand in Los Angeles as of recent, the tech sector made up for that recently.
In contrast, at 21, the Seattle VODI was 43.2 percent below its level of 37 in June, and down 52.3 percent year-over-year.
Flowing at only about one-fifth of its pre-pandemic pace in 2018-2019, Seattle’s VODI is the lowest among all VODI cities. Although Seattle saw considerable new demand in the medium-sized, 10,000-50,000 square foot category, it has seen no new requirements at all for large spaces in the 50,000+ square foot category since June. While the Seattle market occasionally sees a month without new demand in the 50,000+ square foot category, the 3-month absence of such demand from July to September is the only such gap since the early pandemic lockdown period.
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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.
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NEW YORK CITY
NEW YORK CITY
SAN FRANCISCO
SAN FRANCISCO
Despite sharing in common a fairly flat trajectory over the last two years, New York City, Los Angeles, San Francisco, and Boston have very different VODI levels.
In September, the gap between the average VODI of the so-called more-remote-friendly cities (Boston, San Francisco, Seattle, and Washington, D.C.) and the less-remotely-friendly cities (Chicago, Los Angeles, and New York City) was the widest it has ever been, at 41.7 percent, up from 32.4 percent in June.
As we have explained in the past, 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.
Read more local VODI trends
In September the gap between the so-called remote-friendly cities’ VODIs and the others’ was the widest it has been to date.
LOCAL
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VTS Office Demand Index by Market
National
Chicago
Seattle
Washington, D.C.
New York City
Los Angeles
San Francisco
Boston
While the last two years have seen new office demand stagnate at levels well below the pre-pandemic norm in all VODI cities, not every city has experienced the same trend. Because the VODI series tend to be volatile, it is useful to consider the slope of fitted lines that capture the VODI’s average trend in a period instead of just comparing two points in time, with their arbitrariness.
Doing so for the VODI cities for The Stagnation period, i.e. since October 2021, reveals that Seattle lost an average of 1.7 VODI points each month, i.e. more than 20 VODI points per year. It also reveals that Chicago and Washington D.C. lost 1.3 and 0.6 VODI points per month, on average, which add up to about 15 and 7 points per year, respectively.
On the other hand, the VODIs in New York City, Los Angeles, San Francisco, and Boston have been roughly flat over the period, with estimates of average monthly change that are not statistically different from zero.
Read more local VODI trends
From a longer-term perspective, Chicago, Seattle, and Washington, D.C. have seen their VODIs gradually decline over the last two years. New York City, Los Angeles, San Francisco, and Boston have remained roughly flat over that period, though at very different levels.
LOCAL
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METHODOLOGY
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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METHODOLOGY
VTS Office Demand Index (VODI)
LAUREN RIEFFLIN
Kingston Marketing Group
lauren@kingstonmarketing.group
ERIC JOHNSON
VTS
eric.johnson@vts.com
Media Contacts
OCTOBER 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.