Remote Work Revolution Drives Record-High Office Vacancy Rates in the U.S.

Modern U.S. office buildings with rising vacancy rates amid remote and hybrid work shift.

Remote Work and Surging Office Vacancies

The rise of remote and hybrid work has led to unprecedented office vacancies across the United States. By late 2023, the national office vacancy rate hit roughly 19–21%, the highest level on record. This represents a ~60% jump from pre-pandemic vacancy norms (around 12–13% in 2019). Major metro areas have been especially hard-hit – for example, San Francisco’s office vacancy soared to about 36% in 2023, an all-time high for that city. Other hubs like New York, Los Angeles, Seattle, and Philadelphia also saw millions of square feet emptied as companies shed space. The structural shift to remote work has clearly diminished demand for office space, leaving many desks and floors vacant on any given day.

Corporate pushback via return-to-office mandates has only modestly dented this trend. Even as some CEOs insist on bringing staff back in-house, the overall “new normal” is fewer people in the office at any one time. In August 2023, nearly one in five U.S. workers (19.5%) was teleworking, and hybrid schedules (splitting time between home and office) have become standard at countless firms. Five years into the remote-work era, a “permanent reduction in office demand” is evident, according to Moody’s Analytics. Companies simply need less space per employee now. As a result, office footprints are shrinking through lease expirations, sublease offerings, and consolidated locations. Many businesses facing costly long-term leases for half-empty offices have cited “paying for empty space” as a key reason behind stricter return-to-office policies. In effect, the remote work revolution has broken the historical link between job growth and office demand. Vacancy rates have blown past previous records (the last peak was 19.3% in 1991, during the savings-and-loan crisis) and show that the traditional office market is at an inflection point.

Financial Fallout: Plunging Valuations and Rising Distress

From a financial perspective, these high vacancies are hammering office property valuations and revenues. Office buildings are now worth a fraction of what they were before remote work upended demand. One leading index shows U.S. office property values have plummeted ~37% from their spring 2022 peak – the steepest decline of any real estate sector. In some distressed markets, the “great reset” is even more dramatic. For instance, a San Francisco high-rise that sold for $62 million in 2016 fetched just $6.5 million in 2024, an astonishing 90% value drop. Dozens of Bay Area office buildings have changed hands at 50–75% discounts to their pre-pandemic prices. In Washington D.C., average office sale prices have fallen 41% (from ~$294 per square foot in 2019 to $172 in 2023). These fire-sale valuations reflect investors’ dim outlook on older offices with persistent vacancies and eroding rental streams.

Office-focused REITs (Real Estate Investment Trusts) and institutional landlords have felt the pain. More than half of U.S. office REITs saw earnings decline in late 2023 as occupancy and rent revenues fell, even while operating costs rose. Prominent office landlords like SL Green and Vornado have slashed dividends and scrambled to raise cash. Many are resorting to property sales (often at a loss) to shore up balance sheets. Industry-wide, commercial property prices were still ~19% below their 2022 levels as of late 2024, with the office sector dragging down any recovery. As one analyst put it, “legacy leases are expiring, and tenants are rightsizing,” so landlords are left carrying oversized, underperforming assets in their portfolios.

Crucially, loan defaults are mounting as owners decide it’s better to walk away than keep feeding alligator buildings (so called because they eat cash). In early 2023, a Brookfield fund famously defaulted on $755 million of loans tied to two Los Angeles office towers rather than refinance them. That same year, Pacific Investment Management Co.’s Columbia Property Trust defaulted on a $1.7 billion mortgage for seven trophy offices in cities like San Francisco and Manhattan. The Columbia portfolio’s value had fallen ~20% since 2020, and rising interest rates made the loan untenable. These high-profile defaults are part of a broader wave: owners including Blackstone and Vornado have either handed back keys or are negotiating with lenders on major office properties. In some cases, even foreclosure auctions have transferred buildings to new owners at cents on the dollar. Lenders and CMBS trusts are bracing for more distress as office mortgage delinquency rates, while still modest (~1.8% in Jan 2023), are expected to climb.

Insurance costs and challenges have also emerged as a financial side effect of empty offices. Standard commercial property policies often contain vacancy clauses that reduce or void coverage if a building sits largely unoccupied (typically defined as less than ~30% occupancy). Insurers view vacant properties as riskier – they’re more prone to issues like undetected leaks, vandalism, theft, or fire in an empty building. As a result, building owners are facing higher premiums or coverage gaps if they can’t maintain sufficient occupancy. Many insurers now refuse to fully cover buildings that are more than 50% vacant, pushing owners into expensive specialty policies. Landlords must invest more in security, maintenance, and fire protection for half-empty towers to satisfy insurers. This adds another layer of financial strain, effectively a “vacancy tax,” on top of lost rent. Owners are urged to review their policies closely and take measures (like alarm systems and weekly inspections) to avoid breaching vacancy conditions.

Meanwhile, tenants hold the upper hand in lease negotiations across most markets. With abundant vacant space available, companies renewing leases are often downsizing to fewer floors or demanding rent reductions and incentives. Landlords have been doling out hefty concessions to attract or retain tenants – covering larger tenant improvement packages, and offering months of free rent. In fact, tenant improvement allowances rose by roughly 50% post-pandemic, and free rent averaging one month per year of lease term became common. Effective rents (after freebies) have therefore sagged even where face rents nominally held steady. In some cities, asking office rents remain 5–10% below pre-COVID levels, and even those rates are negotiable. “Blend and extend” deals (where tenants extend leases in exchange for immediate rent cuts) have proliferated as landlords try to keep buildings occupied. However, as soon as a lease expires, many tenants are reducing their footprint – or not renewing at all – given the new remote-work calculus. This dynamic has pressured real estate income streams and increased refinancing risk for office landlords, contributing to the cycle of distress.

Investors Recalibrate Strategies

Amid this turmoil, investors and developers are recalibrating their strategies in the office sector. For large institutional investors (pension funds, insurance firms, sovereign wealth funds, etc.), office properties have lost their shine. Many big players who once prized offices in gateway cities as stable, bond-like assets are now scaling back exposure after being burned by the pandemic downturn. One broker noted that what used to be a target of “15 trophy office holdings” for a fund might be whittled down to 5 today. REITs, too, are pruning their portfolios – shedding older or non-core buildings and focusing only on well-leased, high-quality assets. The theme is “flight to quality” (more on that below) and triage of anything that doesn’t fit the new market reality.

On the flip side, a new class of opportunistic investors is jumping in to snap up distressed offices at bargain prices. Private equity funds, family offices, and entrepreneurial developers with access to cash see opportunity in the carnage. In Washington D.C., for example, private buyers made up 33% of office acquisitions in 2022, more than double their share in 2020. These nimble investors often don’t have complex investment committees or legacy assets weighing them down. They can move quickly, pay all-cash or assume defaulted loans, and begin repositioning properties. As one such investor quipped, “it’s like finding out Nordstrom is having a basement clearance sale” – there are deals to be had for those willing to brave the uncertainty. Some are employing “loan-to-own” tactics (buying non-performing loans and foreclosing to gain control of the asset at a steep discount). Others provide rescue capital to struggling owners in exchange for equity stakes or preferred returns, essentially betting on a long-term turnaround.

For these opportunists, the key to success will be creative repositioning of underutilized offices (or simply patience if they believe values will rebound). Many of the assets trading at deep discounts are older Class B/C buildings in prime locations – challenges to lease as offices, perhaps, but attractive candidates for conversion or redevelopment (discussed next). Investors are underwriting deals not on yesterday’s office use, but on tomorrow’s potential, whether it be residential, hotel, lab, or mixed-use. Even within pure office use, buyers are reimagining space for the hybrid era – planning to upgrade HVAC, add amenities, or demise large floors into smaller, flexible suites that match current tenant demand. Not every vacant tower will pencil out, but those that can be acquired cheaply and reinvented have drawn a swarm of capital hunting for outsized returns.

Importantly, not all offices are doomed. Newer, top-tier office buildings are actually holding up relatively well – enjoying stable occupancy and even rising rents in some cases. The market has bifurcated dramatically. A recent analysis by Brookfield noted that 90% of U.S. office vacancies are concentrated in the bottom 30% of buildings by quality (typically older buildings with dated design and few amenities). In contrast, the top-quartile “trophy” office properties – often newer builds or recently redeveloped projects in prime submarkets – are still in demand and commanding premium rents. Tenants that are reducing overall space are “flight-to-quality” – they’d rather lease a smaller suite in a modern, green-certified building with great amenities than maintain a large footprint in an aging, uninspiring office. This means institutional investors are concentrating their bets on those high-end assets (and lenders are more willing to extend credit for them), whereas lesser buildings may be headed for obsolescence. As we’ll explore, this stark divide is driving both adaptive reuse projects and major retrofits as property owners try to bridge the gap between outdated offices and what today’s tenants actually want.

Adaptive Reuse: Converting Offices into New Uses

One of the most promising solutions to the office glut is adaptive reuse – converting underutilized office buildings into other property types that are in higher demand. Developers and city officials alike are increasingly viewing vacant offices as an opportunity to help solve housing shortages, enliven downtowns, or create new revenue streams. Across the U.S., office-to-residential conversions have surged in the wake of the pandemic. In 2023, the number of office buildings being transformed into apartments more than doubled compared to pre-pandemic averages. According to CBRE research, nearly 70 million square feet of office space (about 1.7% of total U.S. office inventory) was in the process of conversion to alternative uses as of Q1 2024 – up from 60 million sq. ft. just two quarters prior. In 2024 alone, roughly 120 conversion projects are slated to complete (versus an average of ~45 per year from 2016–2023). Hundreds more are in planning stages as developers race to reposition outdated buildings.

Office-to-apartment conversions are the most prevalent reuse strategy – accounting for about 63% of all square footage in underway or planned conversion projects. Since 2016, completed office-to-residential projects have created over 22,000 new apartment units in former office spaces, and the pipeline of current projects promises to add another 31,000 apartments in the next few years. Cities like Cleveland have been pioneers: Downtown Cleveland converted 3.5 million sq. ft. of old offices into apartments and hotels over the past several years, permanently removing 18% of its office inventory and helping reduce the downtown office vacancy rate from 19.7% to 17.3%. Other conversion hotspots include Philadelphia, Chicago, Pittsburgh, and Washington D.C., where many mid-century office towers with obsolete layouts are ideal candidates for residential reuse. Even New York City – with its stringent building codes – has launched programs to facilitate office-to-residential conversions in underused parts of Manhattan and Brooklyn, partly to create more affordable housing.

That said, not every office building can (or should) become apartments. Successful conversions typically require a building to have the right physical characteristics – for example, a narrow floor plate (so that apartments can have windows), adequate structural support for new plumbing, and zoning that allows residential use. Many 1970s–’90s era office buildings have large floor plates ill-suited for light-filled residences, or they need costly asbestos remediation and seismic upgrades. For those, other reuses might make sense: hotel conversions (for buildings near tourist or event areas), life science labs or medical offices (in markets with biotech growth), or even schools, data centers, or community uses. Nationally, about one-third of office conversion projects underway are not residential – they include hotels, mixed-use developments, retail marketplaces, senior living, and more. For instance, a vacant federal office in Baltimore is being remade into a biotech lab campus, and an old administrative building in Phoenix is becoming a vertical farming facility. Creativity is the name of the game. Local governments are encouraging these projects through tax incentives, expedited approvals, and in some cases direct funding, recognizing that adaptive reuse can simultaneously address blight and bring new life downtown.

Developers pursuing conversions note that it’s rarely a quick win – “It’s not a flip; it’s a full gut rehab,” as one put it. But with office values so depressed, acquisition costs are low enough to make the numbers work in many cases. One study found office buildings in key cities were trading at values below replacement cost of the land alone, essentially valuing the structures at $0 – a ripe scenario for conversion investment. Still, conversions are not a panacea for the overall office glut. Even the aggressive pipeline of projects amounts to <0.5% of U.S. apartment stock being added. In many markets the volume of vacant office space simply far exceeds feasible conversion opportunities, meaning other solutions are needed for the remainder.

For some aging offices, the best outcome may indeed be demolition or full redevelopment. Real estate experts bluntly suggest that a certain percentage of older office inventory is “functionally obsolete” – if it cannot economically be leased or repurposed, tearing it down to rebuild anew (or converting the land to other uses) might be the last resort. Cities like San Francisco and Houston have begun to see office buildings demolished to make way for housing or even open space. While demolition is a tough pill to swallow for investors, it can alleviate oversupply and remove eyesores. “A large portion of older office buildings will need to be renovated, repurposed, or demolished,” concludes Brookfield’s 2024 office market outlook. In the long run, culling the weakest stock should help rebalance supply and demand.

Retrofitting and Redesign: The Hybrid-Work Office

For the office properties that remain in use, there is a pronounced shift toward retrofitting and redesigning space for a hybrid-work era. Landlords and employers alike have realized that yesterday’s cubicle farms and bland, fluorescent-lit offices won’t entice workers who now have the option to stay home. New spatial needs and tenant expectations are redefining office design: today’s workplaces must justify their existence by offering what home offices cannot – namely, collaboration, experiential amenities, and healthy, engaging environments.

Flexible, collaborative layouts have become a top priority. Instead of rows of assigned desks (many of which sit empty on a given day under hybrid schedules), companies are creating more “flex space” – areas that can adapt to different uses day-to-day. This includes movable furniture, partitions that can reconfigure a room, and shared hot-desking zones that employees reserve when on-site. A key trend is building out numerous collaboration zones: think open lounges, huddle rooms, large conference and training areas, and casual meeting nooks where in-office staff can easily gather. “Newer buildings [are] designed to enhance in-person collaboration while reducing the need for permanent offices and cubicles,” Moody’s analysts noted, and those buildings are outperforming older ones. In practice, this means an office floor might dedicate half its area to team spaces, café-style seating, and meeting rooms equipped with video conferencing, while the other half is unassigned desks or quiet pods employees use on flex days. The goal is to make the office a “collision space” for creative teamwork and social connection – a far cry from the solo workstation focus of pre-pandemic offices.

Integrating advanced technology is another facet of the modern office retrofit. To support hybrid work, many offices are now outfitted with state-of-the-art A/V systems for seamless virtual meetings (e.g. studios for telepresence, smart boards, and high-speed connectivity). Smart office platforms are being adopted to manage the ebb and flow of people – for example, digital reservation apps for booking desks and conference rooms, occupancy sensors to track space utilization, and visitor management systems for touchless check-in. These technologies not only improve the employee experience but also give employers data to optimize their real estate (e.g. which areas are under-used and could be repurposed). Even building operations are getting smarter and greener: IoT sensors and AI-driven controls adjust lighting and HVAC in real time based on occupancy, saving energy and enhancing comfort. High-performance air filtration and monitoring systems have become especially important to reassure workers of indoor air quality in the post-Covid era. Many offices now measure CO2 levels and provide fresh air intake well above code minimums – a selling point for health-conscious tenants.

Wellness and hospitality amenities are being layered into office environments as well. Companies and landlords want the office to be a magnet, drawing people in with features that improve well-being or simply provide convenience. Common upgrades include on-site fitness centers and yoga rooms, mother’s rooms, nap/meditation spaces, and showers/locker rooms to encourage active commuting. Buildings are creating inviting outdoor spaces – rooftop terraces, open-air meeting areas, or ground-level plazas with seating – capitalizing on biophilic design principles that exposure to fresh air and nature can reduce stress. Indoor environments are also incorporating biophilia with plants, living green walls, and abundant natural light. Some high-end offices have added coffee bars, beer taps, cafeterias with diverse food options, or even concierge services and curated events (happy hours, speaker series, etc.) to foster a sense of community. The idea is to make the office visit feel valuable and engaging – more like checking into a well-appointed hotel or campus hub than a mandatory drudgery. This trend aligns with the rise of WELL-certified buildings that focus on occupant health and comfort (spanning air, water, light, fitness, and mind criteria).

Underpinning many of these retrofits is a strong emphasis on ESG (Environmental, Social, Governance) goals, particularly sustainability. Property owners are accelerating capital upgrades for energy efficiency and sustainability, both to meet regulations and to appeal to tenants’ corporate values. In cities like New York (which has carbon emissions caps kicking in via Local Law 97) and across California, older office buildings must be retrofitted with greener systems or face fines. Popular upgrades include LED lighting and smart controls, high-efficiency HVAC and heat pumps, better insulation and window glazing, and on-site renewable energy generation (e.g. solar panels on roofs or parking structures). These improvements can dramatically cut operating costs and carbon footprints – for example, green lease provisions shared by landlords and tenants have reduced office energy usage by up to 22% in some cases. Landlords pursuing LEED certification for existing buildings find it boosts marketability: many tenants (and their investors) now prefer buildings that align with ESG and can help hit net-zero targets. Similarly, attention to social factors – such as inclusive design (accessible, multi-cultural spaces) and community engagement – are part of the new office ethos.

Critically, modern offices are expected to incorporate these “modern-era tenant preferences” or risk losing out. Cushman & Wakefield’s research emphasizes that offices which survive will be those whose owners proactively invest in sustainability features and high-quality amenities to meet evolving expectations. It’s not just about cutting space; it’s about making the remaining space better. This flight to quality is evident in leasing trends: companies are willing to pay equal or even higher rent per square foot for a building that checks all the boxes (transit-accessible location, energy-efficient systems, great amenities, flexible layout), while they vacate older, dull offices even if nominally cheaper. In essence, employers want offices that help attract and retain talent, since those have become part of the employee value proposition. An office that employees enjoy coming to – thanks to collaborative design, wellness perks, and eco-friendly credentials – can support culture and productivity in ways a pre-pandemic office never considered. Thus, architects and designers are busy retrofitting space to be not just utilitarian, but inspirational.

Outlook: A New Urban Landscape Takes Shape

The twin forces of financial pressure and innovative redesign are gradually reshaping the U.S. office landscape. Remote and hybrid work models are here to stay, and the commercial real estate industry is adjusting to that reality. In the near term, office vacancy rates may remain elevated – Moody’s Analytics projects vacancy could hover around the 20% range through 2024 as the dust continues to settle. Many cities will wrestle with partial “office ghost towns” in their central business districts, impacting urban economies and municipal budgets. However, there are reasons for cautious optimism. The painful shakeout is also driving transformation: weaker hands are exiting, and visionary players are stepping in with plans to turn empty offices into something new.

For investors and developers, this period presents opportunities to reposition and innovate. Record-high vacancies have motivated public-private partnerships to fill downtown gaps – from conversion incentives to zoning changes that make it easier to mix uses. We are likely to see more hybrid buildings (for example, lower floors retail, middle floors offices, upper floors residential) creating 24/7 neighborhoods that are resilient to single-use downturns. Institutional capital, while more cautious on offices overall, is still plentiful for the right projects – especially those that promise long-term sustainability, whether via green retrofits or adaptive reuse. Some REITs and private equity firms are already launching funds targeting distressed offices with the intent to buy low and reinvent. In addition, not all markets are equal: Sun Belt cities with strong job and population growth (like Austin, Miami, Nashville) are seeing office demand hold up better, and could absorb space faster once economic conditions improve.

Over the longer term, expect the U.S. office sector to emerge leaner, greener, and more attuned to worker needs. A significant share of today’s excess office stock will likely be repurposed by the end of the decade – contributing to much-needed housing in some cases, and to modernized, efficient workplaces in others. The offices that remain will no doubt look different than those of 2019: less densely packed, more community-oriented, and highly digital. Employers and landlords have learned that quality of space matters far more now that quantity is optional. Flexible work policies will continue to evolve, but even fully remote companies may maintain some touchdown office presence for gathering employees periodically. Thus, the office is not dead – but it is being redefined at an accelerated pace.

For U.S. real estate investors and developers, the message is clear: adaptability is key. Those who can navigate the financial challenges – through creative deal-making, expense control, and strategic capital improvements – while also delivering the kind of spaces tenants crave, will be best positioned to thrive in this new paradigm. The rise of remote work has irrevocably shifted the supply-demand balance, but it has also opened the door to reimagining our built environment. High vacancy rates are a daunting hurdle, but also a catalyst for renewal. In the end, the winners in this transition will be properties (and teams) that marry sound financial strategy with architectural innovation – turning empty offices into the next generation of vibrant, sustainable places to live, work, and collaborate.

Sources: 

Recent market reports and expert analysis, including:

• Moody’s Analytics on record vacancy,

• JLL Research on vacancy trends,

• SFGate and SF Chronicle on valuation plunges,

• Bisnow on investor strategies,

• CBRE on conversion statistics,

• Brookfield on flight-to-quality dynamics,

• and Fortune/Cushman & Wakefield on the future of offices.