Heard about the once-coveted office tower in St. Louis selling for $3.6 million in April — after it sold for $205 million in 2006?  

Or that the Fed expects some banks to fail due to having too much exposure in commercial real estate? 

Headlines like these — coupled with record office vacancy rates and anemic new construction figures — blanket the newscape like two-day-old city snow.  

But underneath, you’ll find: 

• A mass migration back to cities after the pandemic exodus 
• In-demand top-tier office space 
• Positive movement in the artificial intelligence sector
• A 100% increase in renovations from 2019
• A rosier office/commercial outlook for 2025
• Better lease administration software and data analytics 

Complex markets require complex examinations to get a complete picture. Commercial real estate is no exception.  

Ready for the other side of the story? 

Living for the city

During the pandemic, scores of urbanites left the cities for the suburbs and sticks. That’s well documented.  

What’s less documented is the surge back to the cities.  

According to a recent Cushman & Wakefield report, in partnership with CoStar, urban migration has actually surpassed pre-pandemic levels. 

“Not everyone (is) leaving New York City or San Francisco to be in South Beach or Boise,” the report says. “In fact, net migration patterns have returned from the 2020-2021 extremes and in some cases look more promising for large cities than they did prior to the pandemic.” 

The reasons for this reverse exodus abound. Among the top: Opportunity.  

“The urban core continues to be attractive to people looking for economic opportunity and vibrant, diverse places to live,” Cushman & Wakefield says. “Residents have flocked back to the cities.” 

Most vacancies in older buildings 

OK, let’s get the bad news out of the way — 

U.S. office vacancy rates are not good. According to CoStar: 

• 14.2% for New York City
• 16% for Los Angeles
• 18% for Dallas
• 22.6% for San Francisco
• 16.4% for Chicago
• 15.9% for Atlanta

However, here’s where context comes into play: Of all U.S. vacancies, 90% are in the lowest quartile of old, generic offices, according to investment firm Brookfield.  

“We believe the real issue facing the sector is one of oversupply: dated, functionally obsolete office space is plentiful while office buildings that can meet modern tenant preferences are limited,” Brookfield writes in a recent report.  

Chris Lee, a partner at investment firm KKR, recently said at an industry conference that investors should avoid disposing of high-end real estate due to expected demand.  

“Those are buildings we need,” Lee said during a conference sponsored by Emory University. “There’s actually a shortage of those buildings in the country. There’s a shortage of premium office space. 

Artificial intelligence driving demand 

A common fear with AI is that it takes jobs. But myriad sources predict the technology will create more jobs than it destroys and offer other benefits for the economy.  

Let’s start with data storage.  

According to JLL, data storage needs will double from 2023 to 2027. That will require more efficient designs. And THAT will require jobs … 

Which all boils down to real estate.  

“In many cases, existing grid infrastructure will struggle to support the global shift to electrification and the expansion of critical digital infrastructure, making it increasingly important for real estate professionals and developers to work hand in hand with partners to secure adequate future power,” JLL says.  

As a result, North American data center asking rents increased as much as 54% over the past year, according to CBRE. 

Renovations on the rise 

So, this we know: Class A real estate is in low supply. And office workers are increasingly demanding more modern office space.  

As a result, office renovations have doubled since 2019, Cushman & Wakefield says.  

Of all the office occupancy gains in 2023, JLL says, 19% took place in renovated buildings.  

Case in point: A 1920s-vintage government building underwent a major upgrade during the pandemic. As of February 2024, it was 97% occupied at premium rates, with Walgreens as an anchor tenant.   

A rosier CRE outlook 

Thanks to the end of a market correction, lower interest rates and a surge in several sectors, Cushman & Wakefield predicts office employment to recover in 2025. 

In particular, urban office real estate should benefit.  

Cushman & Wakefield says 1.8 million office jobs will be created in the second half of the decade, prompting an increased demand in office space.  

Some analysts already see this momentum. In 2023, 44% of renewals over 15,000 square feet were expansions.  

“When economic uncertainty fades and office job growth picks up again, expect occupancy to stabilize and absorption to turn positive,” Cushman & Wakefield says.  

Tracy Chen, a portfolio manager at Brandywine Global, in March told CNN that she sees upside in commercial mortgage-backed securities.  

These securities with a BBB rating have actually outperformed Treasuries, corporate bonds and other types of loans in 2024. This performance, Chen says, is a solid leading indicator for the commercial real estate market. 

“Any retail that survived Covid is good retail and so people are feeling confident about investing in retail property,” Chen says. “Why shouldn’t the same thing happen to offices in the future? There is lots of hope for the future.” 

How software helps 

In any economy, real estate managers and admins face the burden of optimizing real estate to maximize portfolio savings. That goes double for uncertain economies.  

The best lease administration software and the market’s most proven real estate data and analytics solution are designed to do just that.  

Together, these commercial real estate platforms help you become more proactive with your portfolio and simply drive better deal outcomes.