According to the VTS Office Demand Index (VODI), while the momentum in demand growth for office space slowed slightly in the past month, April marked the fourth consecutive month when demand for office space nationally continued to recover, getting closer to the pre-pandemic benchmark. The VODI tracks tenant tours, both in-person and virtual, of office properties across the nation, and is the earliest available indicator of upcoming office leases, as well as the only commercial real estate index to explicitly track tenant demand.
Currently, at a VODI of 85, demand for office space nationally is 15 percent below the pre-pandemic benchmark. That benchmark is now defined as 100 in the index and is the average VODI, or rate of demand, across 2018 and 2019, a methodological change from months prior. Since January, demand for office space is up 117.9 percent nationally.
As the market continues to recover, seasonal patterns may counteract demand growth, and in some markets that may result in a slight, but expected, cyclical regression. In recent years, the months of March and April were when spring seasonal demand peaked. In the following months, demand fell and then rose again in the summer. It remains to be seen if seasonality will play out as in recent years, or if attractive lease terms and pent-up demand from the pandemic will dominate seasonal trends and fuel a continued surge in demand for office space through late spring.
In April, all markets experienced a modest expected deceleration in demand growth with two markets, Washington, D.C. and Los Angeles, seeing demand for office space slightly pull back. However, the minor retraction is more indicative of typical monthly volatility than it is the beginning of a long-term trend.
“If it were any other year I would be telling you that demand for office space will absolutely pull back in late spring, but this is unlike any other year,” said VTS CEO, Nick Romito. “Companies are making strategic decisions on when they want to return to work and planning for their future with little regard for the calendar. I expect that it will take at least another six months before the market behaves in a typical manner.”
New York sees the greatest growth in demand in April
Of all core markets covered in the report, New York’s demand increased the most from March to April, growing 16 index points or 18.4 percent, and demand is now 2.9 percent above the pre-pandemic benchmark for the market.
In recent months, office tours in NYC have skewed substantially towards Trophy and Class A office buildings, reflecting better COVID-related systems and safety measures in such buildings, as well as renewed ability to tour with fewer Covid-related restrictions and a sense that tenants have an opportunity to upgrade.
“The growth in demand in New York follows a gradual but building sentiment shift with more and more employers, especially in the finance sector, going on the record about their intent to bring their employees back into the office,” said VTS Chief Strategy Officer, Ryan Masiello. “And while the presence of employees in the office is distinct from the demand for office space, this overall shift among New York City employers has likely been a key driver in the growth of demand for office space.”
Like New York, Chicago has also performed well as of late but demand for office space is still 21.1 percent below the pre-pandemic benchmark. Since the first of the year, Chicago has seen a 154.8 percent increase in demand which is enough to push it above where it was prior to the pandemic in February 2020. However, even at the start of the pandemic, demand for office space was already down 26 percent relative to the 2018-2019 average benchmark.
In April 2021, VTS made methodological refinements to the VTS Office Demand Index (VODI) so it would better reflect the underlying market over a longer period of time for the base measure and reduce artificial volatility. As a result of the refinements, the meaning behind an index level of 100 has changed. Prior to the refinements, a value of “100” in each market represented that market’s demand reading as of January 2018. Given the month-to-month volatility of office demand, the average demand over a longer period provides a more meaningful benchmark. For that reason, today, “100” is defined as the average VODI in 2018 and 2019, and is referred to as the recent pre-pandemic benchmark. In addition, VTS made process improvements to better identify unique tenant requirements, including those involving smaller spaces, which may become more prevalent as tenants explore the hub and spoke model with smaller satellite offices.