Commercial classroom: Office market update - Caution is the word of the day - by Edward Smith Jr.

This column is offered to help educate agents new to commercial and investment brokerage and serve as a review of basics for existing practitioners.

The COVID-19 pandemic forced many office building owners to install expensive new air filtration systems, able to screen out airborne particles from their buildings. Those that did so now see more demand for space in their buildings.

Also, since the pandemic most companies have now adopted a hybrid work-at-home format with employees coming into the office three or four days a week. A recent Gallup poll found that more than half of U.S. employees work in a hybrid environment and more than one-quarter are fully remote.

However, efforts are being made to entice employees to want to work in the office more. By changing the office environment, focusing on corporate sustainability that promotes productivity, collaboration and employee well-being. The Cushman & Wakefield Midpoint 2025 Outlook emphasize this, stating that newer buildings equipped with amenities or features designed to enhance comfort and convenience of the employees and are energy efficient are more in demand.

This has had an effect on office buildings, making some more desirable than others. Mike McDonald, a senior managing director at JLL said, “Good buildings are getting better at a faster rate, and bad buildings are getting worst just as quickly.” This is creating trophy buildings in high demand. But he estimates that 35% of the office market now consists of non-competitive buildings destined for conversion or demolition.

This being partially fueled by the increasing costs of building out office space, which varies throughout the country. Now starting around $240 per s/f in the south-central states, in New England costs an average of $262 per s/f, in New York and New Jersey at $280 per s/f and topping out on the west coast at $290 per s/f.

Another factor is a shortage of new office construction. According to McDonald the U.S. is expected to deliver just six million s/f of new office space in 2026, 90% below the post-financial crisis annual averages. Plus, removal of obsolete buildings are further shrinking overall inventory. State and local requirements for reducing carbon emission are an additional expense for owners and builders.

Consequently, this tightening supply is driving up rent and sale prices in some markets.  However, other markets are not doing so well. We will look at two examples.

One of the hottest markets is New York City. According to CoStar, since early 2023 the availability rate in trophy office building has gone from 17% to 10.7% today. Since the start of 2025 there have been over 60 new leases totaling two million s/f signed in Manhattans trophy buildings. Leasing in all other U.S. markets combined totaled nine million s/f. This has created a sense of urgency in New York, with tenants scrambling to secure prime locations before these opportunities disappear from the market.

In Boston, the situation is very different. According to a report from the Boston Policy Institute, office property values are plummeting. Here, once coveted office buildings are now selling at half their previous values. Creating a financial crisis due to declining property tax collections. Commercial property taxes account for 35% of Boston’s municipal budget. The city does have some trophy buildings, but according to the report they only account for less than 15% of the total office inventory. Office vacancy rates have increased from 8% in 2019 to 24% in 2025. Unfortunately, other cities have similar problems.

CoStar has indicated that in areas like New York City rents in trophy buildings range between $100 to $200+ per s/f.

There is also significant capital available to purchase those trophy buildings, coming from high net worth families, private funds, and investors from the Middle East and Asia.

But caution is the word of the day, interest rates have not changed, the tariffs 90-day postponement ended July 9, 2025, and the Israel Iran war could affect the price of oil and increase inflation.

Edward Smith Jr. CREI, ITI, CIC, GREEN, MICP, CNE, e-PRO and CIREC program developer, is a commercial and investment real estate instructor, author, licensed real estate broker, speaker, and a consultant to the trade.