NEW YORK--(BUSINESS WIRE)--After several months of increasing demand for office space across the United States, the emerging recovery has stalled amid a resurgence of COVID-19 and continued economic uncertainty, although demand for leased office space is markedly higher than it was at its lowest point just after the pandemic began. This is according to the new VTS Office Demand Index (VODI), which tracks tenants of office properties entering the market across the nation, and shows demand for office space is still down 56.4 percent from February 2020 pre-pandemic levels.
VTS announced that the VODI would be made available moving forward on a bi-monthly basis. The VODI is the earliest available indicator of forthcoming office leases and tenant sentiment, locally and nationally1, and represents up to 99% of new demand for office space in seven major markets, including New York, Washington, D.C., Los Angeles, Chicago, Boston, Seattle and San Francisco.
Pre-COVID-19, the national VODI was consistently around 100 with some seasonal variation for roughly two years, demonstrating the stability of national office demand pre-crisis.
In February 2020, just prior to the stay-at-home orders that swept the nation in March 2020, the national VODI index value was 94. Three months later, in May 2020, the VODI had declined by 84 percent to an index value of 15. Coming off the bottom, demand initially increased steadily at a rate of around 7 index points a month from June through September, but in October, slightly reversed course and fell by 1 index point to an index value of 41, a signal that a full recovery will likely take time.
“This is, by far, the worst contraction in recent history for the office market as businesses grapple with a global pandemic,” said VTS CEO and co-founder Nick Romito. “While we started to see some signs of life over the summer, businesses experienced a second wave of uncertainty in October due to resurgence of the virus, the elections and the markets. We expect it’s going to be a bumpy ride for months to come, although we’re confident in a long-term recovery.”
The local race to recovery
Market-by-market, there is a wide disparity in demand for office space among the areas covered by the VODI.
The Los Angeles market performed the best, and by October 2020, had gained back 69 percent of the demand lost after stay-at-home orders were issued in March 2020. Los Angeles logged the highest October VODI at 72, up from 14 in May, but down from 98 in February.
San Francisco however, hasn’t shared in the same success. The market was already suffering from decreasing demand prior to COVID-19, and, between March 2019 and February 2020, the San Francisco VODI had fallen from 125 to 55. After the pandemic hit, the San Francisco VODI plummeted to 4 and today has increased to 13 logging flat or negative growth over the last two months.
“California is the tale of two markets. Los Angeles, propped up by the stability of the creative industry, is rebounding well and should continue to thrive as long as the new safer-at-home order is able to mitigate a resurgence in COVID-19. If it doesn’t, Los Angeles could once again see a fall in demand,” said VTS Chief Strategy Officer and co-founder, Ryan Masiello. “San Francisco, on the other hand, started to experience an exodus of tech companies leaving for cheaper rent elsewhere in 2019 and COVID-19 has only compounded the problem. We fully expect the polar market-by-market recovery to continue to be driven by the health of the cities’ core industries and their respective ability to control the spread of COVID-19.”
Table: VTS Office Demand Index (VODI)
February
|
Trough
|
Trough
|
February 2020
|
Current
|
VODI from
|
Month-to-
|
|
National |
94 |
May 2020 |
15 |
-84.0% |
41 |
-56.4% |
-1 |
Boston |
94 |
April 2020 |
27 |
-71.3% |
36 |
-61.7% |
-2 |
Chicago |
57 |
April 2020 |
10 |
-82.5% |
28 |
-50.9% |
-1 |
Los Angeles |
98 |
May 2020 |
14 |
-85.7% |
72 |
-26.5% |
12 |
New York City |
126 |
May 2020 |
8 |
-93.7% |
42 |
-66.7% |
-5 |
San Francisco |
55 |
May 2020 |
4 |
-92.7% |
13 |
-76.4% |
-3 |
Seattle |
86 |
April 2020 |
10 |
-88.4% |
42 |
-51.2% |
-2 |
Washington D.C. |
116 |
May 2020 |
29 |
-75.0% |
67 |
-42.2% |
2 |
New York City had the highest VODI pre-COVID-19 at 126 in February 2020 after a strong 2019. The market, however, was hard-hit by the virus and had the second lowest trough with a VODI of 8 – the largest contraction of any market covered with a decline of 93.7 percent over three months. While the bottom was extreme, New York City had a sharp initial rebound, jumping 9 points in June and 14 points in July to a VODI of 31 – a pace not matched by other markets until September. The market is far from recovered, however, with October demand in New York City one-third of pre-crisis highs.
Washington D.C. and Seattle have both experienced significant recoveries since the pandemic began to affect the office market. Washington D.C. was the most stable of all the markets during the initial months of COVID-19 and today is down 42.2 percent to a VODI of 67 from February 2020 when it logged a VODI of 116. Seattle is down 51.2 percent to a VODI of 42 from a stable February 2020 VODI of 86. However, in October, Seattle experienced a 2-point drop compared to Washington D.C.’s two point gain.
Demand for Trophy and Class A office space in New York City jumps
While demand for office space remains depressed in much of the country, there is a silver lining for tenants shopping in New York City. Over the past several months the demand for Trophy and Class A office space in New York has risen and now accounts for about 70 percent of all office tours. By comparison, in the months leading up to New York’s stay-at-home orders coming into effect, tours of Trophy and Class A office space made up a little over half (55 percent) of the tours, a sign that COVID-19-induced vacancies and lower rents have brought new tenant interest.
Download the full VTS Office Demand Index Report with detailed methodology here.
1 The VTS Office Demand Index is a smoothed but not seasonally adjusted view of the total square feet toured in a given month by tenants with active requirements for office space. To control for new construction and VTS’ own growth into a market leader, this total square footage is normalized against the total property square feet tracked in VTS’ expansive network of leasing, marketing, and asset management software. To enhance comparability across regions, VODI is reported as an indexed value from the base month, January 2018. |
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About VTS
VTS is commercial real estate’s leading leasing, marketing and asset management platform where the industry comes to make deals happen and real-time data comes to life. The VTS Platform captures the largest first-party data source in the industry, which delivers real-time insights that fuel faster, more informed decision making and connections throughout the deal and asset lifecycle. VTS Data, the industry’s only forward-looking market dataset, and VTS Market and Marketplace, the industry’s first integrated online marketing solution, give landlords, brokers, and tenants unparalleled visibility into real-time market information and the direct connectivity to execute deals with greater speed and intelligence at every point in the planning, marketing, leasing, and asset management cycle.
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