References: 

https://www.axios.com/2024/01/09/office-vacancy-rates-record-remote-work-cre

https://allwork.space/2025/08/u-s-office-vacancies-hit-record-20-7-amid-remote-work-surge/

https://www.forbes.com/sites/adigaskell/2023/03/05/how-remote-work-has-affected-real-estate-values/

1) Demand has been permanently smaller—and differently shaped

By mid-2022, annual new office leasing had fallen to roughly 100 million sq. ft., down from a pre-pandemic cadence near 250 million sq. ft., and the gap has not closed materially since. Employers settling into hybrid schedules (often 2–3 days in office) are designing for collaboration peaks rather than daily seat counts, compressing required footprints even as utilization rebounds from the 2020 troughs. In practice, that means fewer long-term, full-floor leases and more flexible, amenity-rich spaces calibrated to peak days and meeting needs. 

Hybrid’s stickiness is visible in the occupancy and leasing data. Even during 2023–2024’s “return to office” push, analysts observed that the prevailing model was not five days in-office. The resulting “fuzzy ceiling” on utilization implies a higher structural vacancy rate, a term used to describe the long-term vacancy rate, than pre-2020, making 2019’s demand a poor benchmark for planning. 

2) Vacancy: records today, elevated “new normal” tomorrow

U.S. office vacancy hit 20.7% in 2025—an all-time high—reflecting both softer demand and a slow lease rollover cycle that reveals downsizing over time. Large coastal and tech-heavy markets have been hit hardest: San Francisco ~27.7% and Downtown NYC ~23%, while other major CBDs contend with a similar recalibration. Analysts warn that national vacancy rates could peak near 24% by 2026 if hybrid trends persist and maturities force space to give back. 

Importantly, this is a structural shift, not a cyclical blip. Even as the broader economy avoided recession in 2023–2024, office fundamentals deteriorated—underscoring that the demand reset is decoupled from GDP growth. Industry forecasters, therefore, expect the “natural” vacancy rate to remain higher than its pre-pandemic level for years. 

3) Valuations: mark‑to‑market and the geography of pain

The valuation hit is real and uneven. Academic simulations for New York City estimate office values fell >40% in 2020 and may still average ~39% below 2019 by 2029, even after stabilization—reflecting lower net operating income expectations and higher cap rates. The broader literature reinforces that remote work has severed the historic link between where we live and where we work, altering the willingness to pay for CBD offices and increasing demand for suburban housing. 

Capital structures magnify outcomes. With roughly $290B in office-related loans maturing by 2027, refinancing at higher rates (and lower values) will force owners to inject equity, sell, convert, or hand back keys. Meanwhile, capital is rotating toward industrial, logistics, and specialized asset types where demand drivers are clearer. 

4) Financial system risk: notable but contained—so far

Despite alarming headlines, the consensus among credit analysts is that office distress, while significant for specific lenders and assets, is unlikely to be systemic at the national banking level. Much of the risk has been recognized in public debt markets, and banks’ direct exposure is concentrated and, in aggregate, manageable—though regional banks with outsized office books remain vulnerable. 

Still, normalization will be slow. Price discovery is challenging due to thin transaction volumes, as debt costs remain elevated compared to 2019, and lenders are prioritizing assets based on their quality and sponsor strength. Expect continued extensions, modifications, and selective takebacks as the market searches for clearing prices. 

5) Flight to quality and the widening bifurcation

Tenants are consolidating into better spaces, not necessarily more space. Amenitized, energy-efficient Class A and “A‑minus” buildings in prime nodes retain demand as employers use the workplace as a talent and culture tool. Older commodity stock faces the double bind of weaker demand and rising capex to meet modern expectations (wellness, collaboration zones, ESG). This flight-to-quality is evident in leasing comps and vacancy spreads across major metropolitan areas. 

 Geography also matters. So-called “superstar cities” still contend with slow office recoveries, while select suburban submarkets and mixed-use districts that offer short commutes and amenity density are showing resilience. This resilience in suburban submarkets can provide reassurance to potential investors. Development overhang in specific Sunbelt markets adds another layer of divergence. 

6) Conversions: essential tool, not a silver bullet

Adaptive reuse is accelerating: ~149 million sq. ft. of office is earmarked for residential conversion, with some cities already demonstrating how targeted incentives can stabilize neighborhoods. Yet conversions are complex—deep floor plates, structural grids, life‑safety codes, and plumbing stacks complicate feasibility, and retrofit costs can rival ground-up builds. Where it does pencil, policy support, zoning flexibility, and tax credits often tip the scales. 

Beyond housing, owners are exploring mixed-use repositioning (food & beverage, entertainment, medical, and education) and, in select locations, logistics/light industrial pivots aligned with e-commerce distribution patterns. These models diversify cash flows and animate districts, but require careful underwriting of local demand and capital intensity. 

7) City finance: the ripple effects of a smaller office tax base

As office values and rents reset, property tax receipts and related municipal revenues are under pressure, especially in CBDs reliant on daytime populations. Research highlights the downstream risks to services (such as transit, public safety, and schools) if the tax base erodes faster than budgets can be adjusted. This fiscal feedback loop also shapes the politics of conversion incentives and zoning reform. 

At the same time, mixed-use revitalization can broaden the base again over time: more residents downtown support retail, improve safety through activity, and stabilize sales and income taxes—even if the office line item remains smaller. This potential for mixed-use revitalization can inspire optimism about the future of city finance. Cities that streamline approvals and align incentives with feasible building typologies will move fastest. 

8) What winning owners, lenders, and investors are doing now

Reposition for purpose, not just price. Convert large floor plates to collaboration-forward layouts, add hospitality-grade amenities, and decarbonize to meet tenant ESG requirements—measures correlated with better leasing velocity. 

Pursue adaptive reuse where economically viable. Underwrite conversion costs rigorously; target assets with favorable floor plates, window lines, and zoning pathways; and stack available incentives. In markets with housing shortages, office‑to‑residential economics improve—if the building cooperates. 

Flex the lease model. Offer shorter terms, expansion/contraction rights, spec suites, and turnkey buildouts that reduce tenant capex and decision friction, particularly attractive for medium-sized firms navigating hybrid uncertainty. 

Manage balance‑sheet risk proactively. For maturing loans, evaluate extend‑and‑pretend versus recapitalizations; consider note sales, preferred equity, and JV structures to properly‑size leverage before values clear. Monitor lender concentrations and terms closely. 

Follow the demand. Submarkets with live‑work‑play density, universities, healthcare anchors, or transit advantages remain relatively bid. Conversely, monolithic office districts without residential or nightlife will require more imagination—and incentive alignment—to revive. 

9) Two-year outlook: scenarios to watch (2025–2027)

Base case. Vacancy remains elevated but stabilizes below the ~24% worst-case forecast as hybrid patterns settle; transaction volumes gradually thaw once interest rates ease and price expectations converge. Values in quality assets begin to firm; commodity stock continues to reprice or convert. 

Downside. If growth slows and credit tightens just as maturities crest, givebacks accelerate, vacancy briefly overshoots forecasts, and distress rises among older Class B/C assets in CBDs. Municipal finance pressure intensifies until conversions and mixed-use revitalization expand the tax base, thereby increasing revenue. 

Upside. A faster rate-normalization path, paired with robust policy support for conversions (zoning, credits, streamlined approvals), unlocks more feasible projects; diversified downtowns regain vibrancy more quickly, and flight-to-quality lifts leasing in best-in-class assets. 

10) Key takeaways

• Remote/hybrid is a durable plan to a smaller overall demand footprint and a higher “natural” vacancy rate than in 2019. 
• Bifurcation is the market—Class A, amenitized, energy-efficient buildings and mixed-use districts outperform; undifferentiated commodity stock underperforms. 
• Conversions matter, but are finite—focus on where building physics and policy enable feasibility. 
• City finance is in play—expect debates over incentives as municipalities seek to stabilize downtowns and tax bases. 

Sources (selected)

• Market and vacancy: Axios (Jan 9, 2024, Moody’s data); Moody’s Analytics CRE insight; Quartz (vacancy forecast). 
• Valuations & research: Forbes summary of Columbia/NYC office value study; Volcker Alliance academic review on remote work and real estate. 
• Conversions & mixed‑use: All workspace reporting (Reuters-linked) on conversions; Real Estate Today overview; Occupier industry analysis. 
• Systemic risk & credit: Axios synthesis on banking exposure; U.S. Chamber analysis on office, rates, and demand. 
• Industry pulse: CRE Daily on utilization and distress; RER on persistent vacancy drivers; Private Capital Investors trend notes.