The story of the office market is an epic tale filled with dramatic twists and turns, reminiscent of a cinematic thriller.

As we delve into in the Moody’s docuseries, Work From Where: Building the future of work and urban life, obsolescence is a key theme in this narrative; however, it is not solely a consequence of the pandemic. Instead, it stems from longer, more subtle changes in how and where we work. While return-to-office mandates are making headlines, the more profound issues regarding flexible work arrangements and evolving office demand will have lasting effects. As a commercial real estate industry, it is our responsibility to examine how these shifts influence failure and success, obsolescence and resilience.

Consider these statistics: during the economic recovery from the Great Recession (and prior to the onset of the pandemic), the total amount of leased office space in the United States increased by a mere 6%. For perspective, leased space for warehouse and distribution properties was up over 20% in that period. Expanding the timeline and changing the metric, office property values have risen by only about one-third of those of multifamily properties since the turn of the millennium. Office has been a laggard within CRE, especially from an aggregate perspective.    

However, this is real estate; disaggregating the data is vital to understanding the nuance of the office market. The performance of Class B and C office properties has weakened the overall market statistics, with the occupied stock of this subset of properties reduced by nearly seventy million square feet during the Great Recession recovery period—a stark contrast to the over 200 million additional leased square feet in the Class A market. This trend will likely continue, but it is just a portion of the story.

Office tenants are finished with 9-to-5 neighborhoods. There will no longer be a continuous row of office buildings on each side of the street; rows that fill up with activity in the morning and empty in the early evening. The same goes for isolated office parks along the highway. The market for talent is and will remain tight for the foreseeable future, and this generation’s talent is willing to make tradeoffs for quality of life. It is growing clear that access to a vibrant location during work is one of those qualities. Market data shows that current office property success tends to lie in mixed-use neighborhoods that resemble 24-hour communities rather than the 9-to-5 zones of the 1980s. Our studies show that the amount of leased office square footage has increased since the pandemic in areas with elevated percentages of housing and retail.

This contrasts with the reduction in leased square footage in what can be designated as office-centric “central business districts” (CBDs). Due to this and the desired survival of many urban cores once dedicated to the office market, archaic zoning regulations are disappearing, giving way to more lenient varieties. Vibrant areas, areas with a critical mass of activity at most hours of the day and night, and areas where office, residential, retail, event, and public spaces coexist are the current and the future of office success.