Office Space: Looking Past the Doom and Gloom

The office market is widely viewed as the problem child in commercial real estate. There’s no doubt the sector has been disrupted and is in transition. But does this mean that working in an office is a thing of the past? We don’t think so. The current environment, which began with a pandemic and was followed by higher interest rates, has simply shined a brighter light on problems that have been building for decades—and what it may take to solve them.

A lot has happened in the last few years to change the way people work and what they want from their workplaces. Remote work arrangements have lifted office vacancy rates while high borrowing costs are depressing property prices and making it harder to refinance loans. A large share of commercial real estate debt in general—and office space debt in particular—will mature in coming years and likely need to be repriced at lower levels.

US Offices: More (Modern) Space Needed

In the US, the issue is often framed solely as a problem of tenant demand. Or, perhaps more precisely, a lack of demand from some employees who are clinging to hybrid or remote work arrangements that were normalized during the pandemic.

These changes in demand patterns are still evolving. But we also think the US is grappling with insufficient supply. There are too few recently built, environmentally friendly buildings near transit and with amenities that appeal to employees and can entice them back to the office. There are also too many older ones with inflexible super-structures, environmentally unfriendly systems and floor plates that can’t easily—or cost-effectively—be adapted to suit tenants’ current needs.