Office CRE: The Rest of the Story Is Still Being Written

4Q21 Commercial Real Estate Insights Report 

To appreciate how significant an impact COVID-19 has had on office properties, including the pivot by companies to remote work, it's important to first go back more than three decades to the 1986 Tax Reform Act. The TRA reintroduced many of the 1981 tax incentives meant to encourage commercial real estate investment - these incentives would later be identified as contributing factors to the overbuilding of office CRE during the first half of the 1980s. CRE professionals with gray hair and career scars from the savings and loan crisis will likely recall how that single event rippled through the economy and culminated with the Resolution Trust Corporation (RTC) - a real estate finance acronym that will forever live in infamy considering its role in cleaning up after the collapse of the savings and loan industry. 

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As was the case then, the premise for investing in office space was turned upside down. Losses in, say, historic office rehabilitations could no longer be used to offset gains in other assets, such as stocks. As a result, partnerships defaulted on loans aggressively made by savings and loans in a deregulated environment. The net impact wiped out S&Ls - a key real estate capital source. A total of 1,043 S&Ls closed between 1986 and 1995, according to the FDIC, which is double the bank failures that occurred during the Great Recession.1  It took nearly a decade until a capital funding replacement emerged to backfill the loss of S&Ls in the form of commercial mortgage-backed securities (CMBS). Ironically, CMBS was the financial instrument that enabled the final cleanup and dissolution of the RTC.2 

Fast forward to 2020, when a pandemic caused the next great office disruption. Like the 1986 Tax Reform Act, this disruption will take years to understand and write the “rest of the story,” as the late radio legend Paul Harvey stated. But before hypothesizing about the office sector's future, let's reflect back on 2018 and 2019 to gain the necessary perspective on office properties before COVID-19.

CRE Insights Warehouse


Office by the Numbers: A Quantification Perspective

Office assets, especially those in large cities with growing technology and financial services industries, were experiencing positive space absorption, declining vacancy rates, rising rents, and stable or declining cap rates prior to the onset of COVID-19 in early 2020. The burgeoning tech workforce was in search of the experiential “live, work, and play” lifestyle in the city. Do you remember the hype and office specification list during Amazon's frenzied HQ2 search in 2018?3  (See the 1Q18 Commercial Real Estate Insights report for more information.) Office space density ratios compressed from 300 sf of office space per worker in the 2000s to 150 sf per person by 2019 - and the design of that space was more open in layout to facilitate creative collaboration. Gone were formal offices with walls and cubicles that segregated the workforce. What replaced it was something like what's pictured here below.4  The predominant theme in office in the years prior to COVID-19 was, “If workspace isn't cool, then it isn't working.” And this mindset gave rise to WeWork and other shared office space concepts. The metrics in both 2018 and 2019 were favorable to investment in office properties; in contrast, 2020 and 2021 have posted negative metrics at levels that surpass the contraction experienced during the 2009 Great Recession.



Net absorption for Class A office space has been hit hard due to COVID-19, according to Colliers.5  From mid-2018 through year-end 2019, Class A office absorption in the U.S. exceeded 10 msf every quarter, with an average of 13.5 msf for the six quarters preceding 1Q20, with 1Q19 leading the way with 22 msf of net absorption. Then came COVID-19 in 1Q20 and Class A office absorption went negative for the first time since 2010. Each successive quarter during this period posted worse absorption than the prior quarter, reaching negative 45 msf in 1Q21 - nearly double the Great Recession's rock bottom of negative 25 msf absorption in 2Q09 and 3Q09.

Office Transaction Activity

JLL Research dissected office transaction activity before and after the arrival of COVID-19, and, like absorption, the change in office property sales quantifies the adverse impact.6  From 2016-2020, quarterly office transaction activity ranged from 47 msf in 1Q20 to 67 msf in 2Q18. The investment interest in office acquisitions, though, plummeted to just 26 msf in 2Q20 and has yet to recover with anything close to the 50 msf quarterly level from 1Q16 through 4Q19. While transaction activity has remained net positive thus far, much of this activity is in suburban and secondary MSA Class A assets where workforces are currently relocating, such as South Florida; Nashville, Tenn.; Charlotte and Raleigh, N.C.; Boise, Idaho; Salt Lake City; and Phoenix. These population and workforce migration patterns can be seen in the 2020 U-Haul Migration and United Van Lines Moving reports and became more evident in the 2020 census data. The noteworthy observation here is that investors have hit a cautionary pause button on office investments until they can sort out the temporary or permanent nature of remote work accelerated by COVID-19 and understand the change in workforce migration.

JLL 2Q21 Report


Something that has been underreported about the increasingly sticky situation with remote work is that the trend toward less time in the office was well underway before COVID-19, as the workforce wrestled with affordability issues in the largest and most dense office markets in the U.S. According to JLL, the five MSAs with the most office inventory are also among the most expensive to live in. These five MSAs are New York with 464 msf, Washington, D.C., with 336 msf, Chicago with 256 msf, Dallas with 194 msf, and Los Angeles with 190 msf. The question, therefore, regarding remote work is: Which driver came into play first - a lack of affordability in the largest office MSAs or COVID-19? The answer is important to investors because if they ignore the affordability element and assume office CRE will return to 2018-2019 levels in the foreseeable future, they may be surprised at the why and where behind key office metrics like absorption, vacancy, and transaction activity. My view is that COVID-19 merely accelerated and added to the stickiness of the situation occurring with remote work due to affordability issues. Just look at the data shared in this report from the 2020 U-Haul Migration report and the 2020 U.S. Census. Is workforce migration foretelling where office demand is shifting after COVID-19?


The Times They Are A-Changin' 

In 1964, Bob Dylan recorded a song about change that became one of the greatest tunes in rock history. Three messages embedded in “The Times They Are A-Changin'” underscore the investment attitude of many office property asset managers almost two years into the COVID-19 pandemic:

1. Change is constant.
2. You can't expect anything to remain the same.
3. Anything that appears one way today may appear differently in the future.

Office property has been through disruptions before (like the 1986 Tax Reform Act and the Great Recession), and changes that followed returned the office sector to a desired asset type fueling more investment and new construction activity (like the creation of CMBS).

What will change regarding the utilization and investment profile of office that will transform this property type's out-of-favor perception in 2021 to something more desirable in 2022 and beyond? Office investors may not be thinking through many qualitative workforce, social, generational, and even ESG (environmental, social, and governance) influences, because they are distracted by headlines dominated by the rise in cases of the delta variant of the coronavirus in 2H21, the emergence of the Mu variant, and a potential return to some sort of shelter-in-place orders again this winter - or at least the continuation of remote work policies by traditional office space-using industries like financial services and technology. While all these influences cannot be covered in this paper, a few are worth consideration heading into 2022.

For one, traditional measures of employment as a proxy for office demand will become less predictive − especially the longer COVID-19 stays in the picture. 

Green office building


Office property demand models have been designed around the assumption that there is a direct correlation to job growth. As long as the U.S. Bureau of Labor Statistics Employment Situation Summary indicates 200,000 to 400,000 net new jobs per month, office property demand will expand in the 2 percent range per year. The problem now is that not as many of those jobs will need office space. Take logistics and e-commerce, for example, where office work will be part of a large e-commerce fulfillment warehouse. The question then becomes, “What is the new correlation of job growth to office space demand?” Nobody knows - and every major commercial brokerage and property investment firm is scrambling to develop a new model. Kevin Thorpe, chief economist for Cushman & Wakefield, stated it best with the following two observations associated with the company's midyear office report:

1. “The longer COVID-19 is present, the more transformative it is going to be.”
2. “The bigger question regarding remote work is its ripple effect to the service economy - think about business travel-oriented hospitality and transportation companies (such as airlines and Uber) with fewer office workers traveling, commuting, and gathering to meet colleagues and clients in person.”

All these service companies also have in-office workers who occupy office real estate to manage corporate and logistics operations. Do these ripple-effect office jobs from the service economy in dense urban office markets function more efficiently working remotely? And how do office demand models adjust for these office-related jobs that are also going remote in part or in full?

Consider the recent announcements by Google, Apple, Microsoft, Salesforce, and the like - all indicating an expansion and extension of remote work into 2022.

SAN FRANCISCO (AP) - Technology companies that led the charge into remote work as the pandemic unfurled are confronting a new challenge: how, when, and even whether they should bring long-isolated employees back to offices that have been designed for teamwork.

“I thought this period of remote work would be the most challenging year-and-half of my career, but it's not,” said Brent Hyder, the chief people officer for business software maker Salesforce and its roughly 65,000 employees worldwide. “Getting everything started back up the way it needs to be is proving to be even more difficult.”

That transition has been complicated by the rapid spread of the delta variant, which has scrambled the plans many tech companies had for bringing back most of their workers near or after Labor Day weekend. Microsoft has pushed those dates back to October while Apple, Google, Facebook, Amazon, and a growing list of others have already decided to wait until next year.”7 

Woman video chatting


The bottom line is that office demand models are obsolete due to COVID-19 and remote work.So how does an appraiser, broker, site-selection expert, or corporate facilities officer ascertain how much office space is needed going forward? And should they renew an existing lease or issue an RFP for more or new space? And in what market or submarket should that office space be located?

Generational Workforce

Workforce composition is going to answer all the aforementioned questions. Older workers are leaving the workforce at the fastest pace ever, and millennials and Gen Zers are going to have a lot to say about office space needs and remote work. In September, the New York Federal Reserve released its latest Survey of Consumer Expectations. The labor component revealed workers 50 and older plan on exiting the workforce sooner. According to the report, “the average expected likelihood of working beyond age 62 ticked down to 50.1 percent, from 51.9 percent in July 2020. This 50.1 percent level was the lowest reading since the start of the series in March 2014. The average expected likelihood of working beyond age 67 also declined to 32.4 percent, from 34.1 percent in July 2020.”8 

The New Forward-Looking Office Property Performance Measures

Where should office property investors and their advisers look for more predictive office demand data? Two suggestions are Kastle Systems and sublet office reports by major brokerages such as Colliers.

Kastle Systems Back-to-Work Barometer 

Kastle Systems is the technology company that handles electronic keycard systems allowing access to office buildings for many companies and property managers. Measuring this activity is a great proxy for whether the workforce is returning to physical office space. Kastle's data shows that less than 25 percent of office workers were returning to the office in 1Q21 at the onset of vaccinations. Despite more than half of all adult/working-age Americans being vaccinated, just over a third have returned to the office as of Oct. 18. The company's Back-to-Work Barometer can be as useful a proxy for office property investors and brokers as the TSA Passenger Count is to the leisure and travel sector of CRE. The TSA metric foretold the recovery in travel from less than 500,000 daily passengers in 1Q21 to now more than 2 million. I am in the camp that believes the Kastle Systems Back-to-Work Barometer will be just as predictive for the recovery of office utilization.

Office Sublet Vacancy

CRE brokerage companies such as Colliers have led the charge on this data during COVID-19. In November 2020, Colliers again began tracking sublet vacancies in their quarterly Office Market Outlook reports. The 2Q21 edition showed the U.S. had more sublet office vacancy than at any point since data began being tracked in 1990 - and a shocking 30 msf more than at the peak of the Great Recession.9  Colliers tracks this data at an MSA level and reports across most major markets (excluding the San Francisco, Houston, New York, Chicago, and Washington, D.C., elevated outliers) that sublet vacancy now adds approximately 2 percent to the overall vacancy rate compared to pre-COVID-19. The report also cites that sublet vacant space rents are anywhere from 25 percent to 50 percent below market asking rents.

Kastle back to work barometer

The updated nationwide office market statistics from Colliers in mid-2021 were still concerning - especially regarding absorption and sublet office vacancy:

Absorption -  “Negative absorption over the past five quarters stands at a cumulative 153.1 msf, greatly surpassing the 92.4 msf seen during the [Great Recession], which spanned nine quarters.”

Sublet Space -  “Sublease space remains a key contributor to the increase in vacancy rates. There is now a record 208.6 msf of sublease space available across the U.S. office market, significantly higher than the prior peak of 143.3 msf in 2Q09.”10 


These negative absorption and sublet vacancy statistics show that investors should continue to anticipate material competition on rents from sublet vacant space. As a result, a significant repricing of office property is ahead. Vacancies won't be the earliest warning signal of trouble ahead for office CRE - the Kastle Back-to-Work Barometer and sublet vacancy metrics will.


Look Up and Forward - The Outlook for Office Property in 2022 and Beyond 

In my experience, there is no chance of finding light at the end of a dark tunnel unless one looks up and forward. Looking down or backward only confirms what we already know - office property is not where CRE investors want to place capital due to the uncertainties around COVID-19, the extension and more permanent adoption of remote work, and a changing workforce. The future for and opportunities in office properties will only be found by focusing on forward-looking data and metrics. What are those sources and metrics to pivot to in the second half of 2021 and into 2022?

In addition to monitoring quarterly earnings for major office tenants and their announcements regarding remote work and the previously discussed Kastle Systems Back-to-Work Barometer and sublet office vacancy data by national CRE brokerage firms, three others are recommended:

1. CPPI Measures (Commercial Property Price Index)
2. NAREIT Office Property Returns
3. CompStak Data



CPPI Measures

Two organizations provide credible data on commercial property price increases - Green Street and Real Capital Analytics (recently acquired by Moody's Analytics). Both CPPI sources show that office property price increases have declined substantially and are currently negative (-6 percent from pre-COVID-19) or have the second-worst change behind malls (-13 percent from pre-COVID-19). Capital is being lured to industrial (+41 percent CPPI), self-storage (+40 percent), and manufactured housing (+31 percent). Not too long ago, office was experiencing double-digit price increases. Keep in mind the message from Bob Dylan's “The Times They Are a Changin'”: You can't expect anything to remain the same. Monitoring CPPI provides office investors the opportunity to see the change as market conditions turn.

The RCA CPPI is different from the Green Street CPPI in that it tracks a broader array of office properties across many MSAs (Green Street's CPPI is primarily based on institutionally owned assets). At mid-2021, RCA's CPPI showed the differentiation between the performance of central business district office (-4.6 percent) compared to suburban office (+11.7 percent) YOY. This CPPI data lends support to the hypothesis that workforce migration is benefiting suburban office property due to affordability issues and the impacts of COVID-19.



NAREIT Office Property Returns

National Association of Real Estate Investment Trusts' Midyear 2021 Economic Outlook on REIT performance noted similar findings to the aforementioned CPPI data - namely, that office property lagged most commercial property types in overall performance. The NAREIT data goes further than the CPPI data by analyzing the total return for each property sector. In other words, it goes beyond just transaction prices and quarterly valuation estimates, and incorporates the effect of rents and operating expenses on NOI. In essence, NAREIT's total return measure incorporates the impact from items like sublet space on rents and higher operating expenses for other services, like janitorial and cleaning due to COVID-19. At mid-2021, the YOY total return for office was -11.7 percent, the second-worst behind retail and diversified REITs at -12 percent and -12.8 percent, respectively. What REIT property sectors were producing total returns to attract investment capital in 1H2021? Like the CPPI data, the answer is self-storage (+32.1 percent), single-family residential (+21.2 percent), and industrial (+18.2 percent).

CompStak Data Leasing activity is the bellwether indicator for when total return and price metrics will change. By the time you analyze transaction data, you are typically too late to be ahead of a changing investment pattern. CompStak, a leading crowdsourced CRE platform, is to leasing comps what many regard CoStar is to property transaction data. By mid-2021, CompStak was tracking leasing activity on 1.5 million properties. Approximately 30,000 appraisal, brokerage, and investment companies use and contribute to its database of more than 4 million leases. It is reliable because there is an extensive validation process for primary sources, and it is affordable because access is based on a point system for the lease comps users provide.

The Rest of the Story

The rest of the story on COVID-19's impact on office properties and remote work has yet to be written. The longer the pandemic persists and new variants emerge, resulting in the extension of remote work, the stickier a situation remote work is going to be. To more accurately foretell the future price and total return metrics post-COVID-19, office property investors and participants need to adopt a whole new set of data sources and metrics to monitor and recreate a more sustainable and balanced remote work model. Office demand models need to be recalibrated and dynamic, moving away from the models that assume X number of new jobs equates to Y percentage growth in office demand. Kastle Systems Back-to-Work Barometer, sublet space data by brokerage companies such as Colliers, CPPI from Green Street and RCA/Moody's, and real-time leasing activity intelligence from CompStak are just a few of the forward-looking resources office property investors should put on their radar. And there are other resources and metrics I discover every quarter. For example, I recently came across the Service Employees International Union that reports on the utilization of office building janitorial workers. It currently reports that 15 percent of its serviced office buildings have yet to reopen, and more than 3,000 U.S. cleaning crews are idled due to remote work.

To close out this discussion, I'd like to leave you with a quote from Christine Putur, REI's EVP of technology and operations, following the outdoor retailer's announcement to sell its new HQ building rather than move into it:

“We felt there are moments when being physically together makes a difference, but it doesn't have to be all the time. We want to move forward with more habits, new norms - let the outcomes drive when and how we get together.”

What are your thoughts?

This report is intended to start a dialogue. Share it with clients and colleagues, and send your thoughts to


  1. FDIC Historical Timeline
  2. Trepp: “Evolution of the CMBS Market”
  3. 1Q18 Commercial Real Estate Insights Report - Amazon HQ2: A Reset Button for Site Selection
  4. Bisnow: “Slack Is Transforming The Way We Work. This Is What It Wants From Its Office Space.”
  5. Colliers U.S. Q1 2021 Office Market Statistics
  6. JLL Q2 2021 United States Office Outlook
  7. AP: “Silicon Valley finds remote work is easier to begin than end”
  8. Federal Reserve Bank of New York: Survey of Consumer Expectations
  9. Colliers Q2 2021 Office Outlook Report
  10. Colliers Q2 2021 Office Outlook Report

Author bio and acknowledgements


CCIM Institute Chief Economist Kiernan “K.C.” Conway, CCIM, CRE, MAI, is the mind trust behind Red Shoe Economics, an independent economic forecasting and consulting firm furthering his mission as The Red Shoe Economist by providing organic research initiatives, reporting, and insights on the impact of economics within the commercial real estate industry.  A proud graduate of Emory University with more than 30 years of experience as a lender, credit officer, appraiser, instructor, and economist, Conway is recognized for accurately forecasting real estate trends and the ever-changing influences on markets all across the United States. With credentials from CCIM Institute, Counselors of Real Estate, and the Appraisal Institute, he also currently serves as an independent director for Monmouth REIT MNR. A gifted and prolific speaker, Conway has made more than 850 presentations to industry, regulatory, and academic organizations in the last decade, and has been published in many national and regional newspapers and journals with frequent contributions to radio and television programming.


CCIM Institute Executive Leadership

President Timothy S. Blair, CCIM

President-Elect Leslie G. Callahan III, CCIM

First Vice President David Schnitzer, CCIM

Treasurer Steve Rich, CCIM

Red Shoe Economics

Beverly Keith, CCIM, CRX, Principal and Business Strategist

Caylinn Peterson, CCIM, Project Research Strategist 

Editorial Team

Larry Guthrie, CCIM Institute 

Nicholas Leider, CCIM Institute

K.C. Conway, CCIM, MAI, CRE

K.C. Conway, CCIM, MAI, CRE, is CCIM Institute's chief economist.