March 17, 2025
The shift toward remote work driven by the COVID-19 pandemic has significantly impacted commercial real estate, especially in the office sector. Initially, major cities across the U.S. saw office occupancy plunge by as much as 90 percent during early 2020. Although occupancy rates have improved, they remain approximately 50 percent lower than pre-pandemic levels as of late 2023.
Interestingly, the demand for office space shows a clear link to companies' hybrid work strategies. Businesses requiring employees in the office only one day per week experienced a sharp 41 percent drop in office-space demand from 2019 to 2023. However, those with employees working onsite two to three days weekly saw only a 9 percent decrease. Remarkably, companies expecting employees in the office four or five days weekly even saw slight growth in office space demand.
Financially, the impact is significant. In New York, the value of office spaces plummeted nearly 50 percent from 2019 to 2020, resulting in a staggering $90 billion decrease by late 2023. Nationwide, the total loss in office value amounted to approximately $557 billion during this period.
Looking forward, researchers anticipate two possible scenarios for office markets: stabilization or continued decline. Under a stabilization scenario, office values in New York are projected to settle around 47 percent below pre-pandemic levels by 2030. Conversely, if hybrid or remote work further reduces office occupancy, values could fall as much as 67 percent.
This shift has also affected lease revenues. Annual revenue from active leases dropped from $91 billion in 2019 to $77 billion in 2023. Additionally, new lease signings drastically reduced from 414 million sq. ft. annually in late 2019 to about 150 million sq. ft. in late 2023.
Yet, there is a silver lining: newer office buildings with better amenities have retained their value more effectively than older buildings, signaling a "flight to quality" among tenants.
Urban areas could face challenges from declining commercial tax revenues, potentially leading to increased taxes elsewhere or reduced city services. To mitigate these impacts, cities are increasingly looking at innovative solutions, such as converting vacant office spaces into multifamily residences. Programs like New York's Office Conversion Accelerator are already underway, reflecting a broader national trend toward adaptive reuse in commercial real estate.
Disclaimer: This content is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice.
