The Office Market Reckoning is Nigh

Remote working is still upending the office property sector. In an article I wrote for Real Estate Issues in 2021, I considered the early evidence that working from home and hybrid work arrangements were likely to be lasting legacies of the pandemic.¹ Two years later, the “will they or won’t they return to the office“ debate is largely settled: workers won’t be sitting at their company desks nearly as often as before the pandemic – and firms won’t be occupying nearly as much space.

After reviewing the emerging new dynamics of office leasing, I focus in this article on the impact that reduced office tenant demand on property capital markets. Already property values have fallen more in the office sector than in any other property sector, while investment returns have been the lowest. And that pain will only intensify as market conditions weaken further.

But as with the shakeout in the retail sector, outcomes for individual owners and buildings will be highly differentiated. The premier buildings – those with the best locations, designs, amenities, and services, and especially health and safety features – will prosper with high occupancies and record rents. Much of the commodity “B” space will continue to muddle along.

But many other buildings in the middle will see a dramatic reversal of fortune, including some formerly Class “A” offices that until recently commanded premium rents. This is where we can expect to see the greatest concentration of distress and value destruction.

Read my deep dive article in Real Estate Issues published by the Counselors of Real Estate