How Return-to-Office Mandates and Workforce Reductions Are Accelerating the Office Sector Crisis
By Odell Murry
- INTRODUCTION: “Return to Vacancy?” — The Quiet Storm Reshaping Office Real Estate
This third installment in our “Distressed Property Trends” series explores how widespread workforce reductions—both in the public and private sectors—are pushing the office sector to its breaking point. We’ll look at where the cracks are forming, how lenders and investors are responding, and what forward-thinking mortgage professionals must do to adapt.
We are no longer simply reacting to pandemic-era disruptions. We are now watching the office market adjust to a fundamentally different reality. Those of us who finance commercial properties must understand that in today’s world, vacancy isn’t just a statistic—it’s a signal that the rules have changed.
The federal government may be the biggest mover in reshaping the commercial real estate landscape, as it has pursued deep cuts in the federal workforce and the number of governmental contractors it employs. Meanwhile, private sector firms—from tech giants to financial institutions—are undergoing their own internal contractions. Companies have learned they can do more with less—fewer employees, fewer square feet, fewer long-term lease commitments.
As of late 2024, national office vacancy rates hit 19.8%, the highest rate recorded in modern U.S. commercial real estate history. In places like Los Angeles and San Francisco, those numbers soar well above 30%, with entire buildings sitting dark. Estimates place distressed Commercial Mortgage-Backed Securities (CMBS) office debt between $15 billion and $18 billion, reflecting the highest levels since the global financial crisis.
- A CHANGING WORKPLACE: The Dual Forces Shaping Office Space Demand
- Federal Return-to-Office Mandates: From Telework to Reclaiming the Office
Shortly after the new presidential administration was sworn in, federal agencies began to enact hiring freezes and headcount reductions. The administration has aggressively pursued an effort to shrink its federal workforce, one that has eclipsed the pace of similar efforts from previous administrations. The U.S. Bureau of Labor Statistics data shows the federal government may have reduced its workforce by some 57,000 by the start of July 2025. Many federal contractors also have undertaken a headcount reduction, as the federal government also has issued stop work orders on a bewildering number of grants and programs.
The government has outlined plans to dramatically shrink its real estate footprints by up to as much as 50 percent in some cities. The ripple effect of these actions on the U.S. commercial real estate market will reverberate for months, if not years to come. As one veteran leasing consultant put it, “The government isn’t just a tenant—it’s a market mover.” These massive footprint reductions create a domino effect, hitting landlords in D.C., Atlanta, Philadelphia, and other government-heavy markets. When agencies shed space, they leave behind empty buildings, slashed property tax bases, and investors scrambling to fill the void.
Many of these reductions are happening mid-lease or without immediate replacements. This creates a wave of “shadow vacancy”—space that is technically leased but functionally unused and unlikely to be renewed. For commercial mortgage professionals, that means both rising exposure to non-performing loans and refinancing challenges in buildings once considered rock-solid investments.
- Corporate Consolidation: Less Headcount, Less Office
The private sector is undergoing its own transformation, as major companies across tech, finance, and media have announced sweeping layoffs, citing economic uncertainty, automation, and margin compression. Tens of thousands of white-collar jobs have been eliminated. At the same time, many employers have permanently embraced hybrid work. All this leads to smaller headcounts, lower space requirements, and a hard look at which offices are truly necessary.
All of this has driven a surge in sublease inventory, which now sits at record highs in many markets. And we’re seeing a sharp “flight to quality”, with tenants leaving behind Class B and Class C buildings in favor of newer, more amenitized Class A properties. Unfortunately, this means many older buildings—those without modern HVAC, flexible layouts, or LEED certifications—are being quietly marked as obsolete or non-performing by lenders.
III. CAUSE AND EFFECT: How Mandates & Cuts Accelerate CRE Distress
- Rising Vacancy Meets Falling Demand
These twin trends have pushed national vacancy rates to levels we haven’t seen in more than three decades. At the end of 2024, the average U.S. office vacancy rate stood at 19.8% and continues to inch upward. But in certain major markets, the numbers are even more alarming:
- Washington, D.C.: 21.3%
- Los Angeles: 31.8%
- San Francisco: 33.9%
Also, many tenants, especially those with expiring leases, are choosing not to renew or are actively negotiating early exits. Some are still paying rent, but using only a fraction of their leased space. These “silent defaults” may not appear on a lender’s radar right away, but they’re a slow bleed that steadily undermines asset performance.
In many cases, landlords are being forced to offer major concessions just to keep tenants in place—lower rents, shorter lease terms, and generous tenant improvement allowances. While this may help delay vacancy, it also lowers the property’s income and, by extension, its appraised value.
- Commercial Mortgage Performance Falters
Pressure is building in the commercial mortgage market. Office properties backed by CMBS loans have seen a dramatic increase in distress. In 2024 alone, office CMBS delinquencies jumped more than 90%, reaching 10.35% by November and trending upward. That figure is likely higher in 2025 as more loans come due during continued uncertainty.
One of the most visible examples came from Brookfield, one of the largest property owners in the world. The company defaulted on significant office loans exceeding hundreds of millions of dollars tied to buildings in Los Angeles and Washington, D.C. That sent a chilling message to lenders and investors alike: If even institutional giants are walking away from office assets, what happens to everyone else?
Compounding the problem is a wave of upcoming loan maturities. Many of these loans were issued during the low-rate era of the 2010s, under much more favorable conditions. Now, borrowers are facing rising interest rates, stricter underwriting, and lower appraisals.
Some lenders are trying to work out extensions or modify loan terms, but others are cutting their losses, triggering foreclosures or encouraging deed-in-lieu agreements. As private lenders we are stepping in to fill the void, but we are doing so at lower Loan-to-Value ratios (LTVs) and higher costs. Rating agencies are downgrading entire office-backed CMBS tranches, and institutional investors are rebalancing away from office exposure altogether.
This is where market awareness must become market readiness. Understanding which properties are vulnerable, how leases are structured, and what financing options remain available is no longer optional.
- REGIONAL REALITIES: How the Impact Differs Across Markets
The commercial office downturn is not playing out evenly across the country. Geography matters. Federal leasing patterns, state workforce policies, local tax structures, and migration trends all play a role in how this disruption is impacting each city.
- Washington, D.C.: The Epicenter of Federal Pullback
Washington, D.C., of course, is the single most exposed market in the country when it comes to federal leasing, as the GSA anchors much of the city’s downtown office stock. In recent months, agencies under GSA management have begun giving back space at a pace that was once unthinkable. The city is feeling the financial impact. Washington, D.C. relies heavily on property tax revenue from its dense office core to fund essential services. Every square foot vacated by the federal government chips away at that tax base.
For mortgage professionals, this creates a high-stakes situation. Many of the buildings impacted by the federal pullback carry legacy financing structures that assume long-term government occupancy. Now, those assumptions are breaking down.
- California: State-Level Echoes & the Los Angeles Collapse
California’s state government, while not as large a tenant as the federal apparatus, still controls millions of square feet of office real estate. And it has embraced a more remote and hybrid workforce. From 2021 through 2024, California has given back hundreds of thousands of square feet in leased office space.
In 2025, Governor Gavin Newsom issued a return-to-office directive requiring most state employees to report in four days per week, but it hasn’t led to a corresponding uptick in office demand. Instead, the state has doubled down on its space-reduction efforts, consolidating offices, relocating workers, and exiting leases in underperforming buildings.
The ripple effects are being felt hardest in Los Angeles. The city’s central business district is already grappling with more than 31% office vacancy—among the highest in the nation. We’re seeing high-rise buildings go dark and owners defaulting.
The fallout is particularly severe for Class B and C properties—buildings that were already struggling before the pandemic and are now functionally obsolete. Financing these properties is becoming nearly impossible.
- Other Markets: Watching and Waiting
Beyond the hot zones of D.C. and California, other regions are watching closely—and preparing for what may come. Cities like New York, Chicago, and Philadelphia are in the midst of their own RTO transitions, with mixed results. Some agencies are returning, some are consolidating, and many are still undecided. The uncertainty is making it difficult to underwrite long-term leases or price risk with any confidence.
Meanwhile, Sunbelt cities like Austin, Atlanta, Miami, and Phoenix are showing more resilience. These metros have seen strong population growth, diversified job markets, and more flexible approaches to workspace usage.
That doesn’t mean they’re immune to distress—only that they may have more time and tools to adapt. In these markets, we’re seeing more creative lease structures, increased subleasing activity, and growing interest in mixed-use redevelopment.
For lenders and investors, this is where new opportunities may emerge, but due diligence will be key. Just because a city has a hot job market or high inbound migration doesn’t mean every office building is a good bet.
Mortgage professionals must take a region-by-region view, understand the shifting sands of public and private sector demand, and adjust risk models accordingly.
- EMPLOYEE & UNION RESPONSES: The Cultural Shift
The growing divide between leadership goals and workforce sentiment is adding another layer of complexity to an already fragile commercial real estate ecosystem. Labor unions have taken the lead in fighting back against return-to-office mandates, with organizations like SEIU Local 1000 and the American Federation of Government Employees (AFGE) filing complaints and organizing resistance.
The cultural shift brought on by remote work over the past four years has been profound. Employees have adjusted to better work-life balance, fewer hours lost to commuting, and increased productivity at home. Companies and government agencies want to fully utilize expensive real estate footprints, but they risk losing experienced talent by pushing too hard.
For commercial mortgage professionals, this push-and-pull has serious implications. Office occupancy rates are increasingly being shaped by labor relations and cultural preferences. Understanding workforce sentiment is now part of assessing real estate risk. Ignore it, and you risk misreading the viability of tenants and the stability of cash flows.
- OPPORTUNITIES AND RISKS FOR MORTGAGE PROFESSIONALS
For mortgage professionals who know how to read between the lines of this wave of disruption, there are real opportunities to add value, provide solutions, and stay ahead of the next wave. But to do that, we need to take a hard look at what’s viable, what’s vulnerable, and how the capital stack is being rewritten in real time.
- Identifying Viable vs. Vulnerable Assets
The first step is triage. Not every office building is doomed, but it is vital to identify those that are. If a property is already saddled with high vacancy, thin reserves, and maturing debt, the odds of survival without intervention are low. Lenders and investors must dig into the details of tenant rosters, lease roll schedules, and renewal probabilities.
The most vulnerable assets today are those caught in the middle between viable and doomed. These buildings may not be high-end enough to attract top-tier tenants, and are not distressed enough to justify a deep discount or repositioning strategy. They may become the “zombie buildings” of this cycle—generating just enough income to limp along, but with no real upside.
- Financing Tactics in a Distressed Cycle
As traditional financing dries up, alternative capital is stepping in. The past year has seen a significant rise in non-bank lending: bridge loans, mezzanine debt, and preferred equity are becoming common tools to restructure deals and buy time. Capital providers who understand distress and have flexible mandates are in high demand.
Underwriting standards have shifted dramatically. Gone are the days of aggressive pro formas and loose credit. Today, lenders want to see:
- Lower loan-to-value (LTV) ratios, often 55% or less
- Strong debt service coverage ratios (DSCR), typically north of 1.35x
- Clear exit strategies, with fallback options in case a refinance or sale doesn’t materialize
Creative structuring is also making a comeback. We’re seeing everything from participation loans to joint ventures with equity kickers. In some cases, owners are selling partial interests or bringing in new partners to recapitalize stalled assets.
For mortgage professionals, this is a moment to differentiate. Those who can source creative debt, help restructure troubled deals, and bring clarity to a murky landscape will have no shortage of business.
- Adaptive Reuse and Conversion Potential
Of all the buzzwords floating around the office market right now, “conversion” might be the biggest. The idea is simple: take obsolete office buildings and turn them into something useful—typically apartments. The execution is anything but.
Conversions are costly. Many office buildings weren’t designed with plumbing stacks, window lines, or floor plates that work for residential use. Zoning laws often need to be rewritten. And financing these projects requires patience, political will, and a deep understanding of both construction costs and long-term value.
In the right locations, conversions can work. Cities like Washington, D.C., San Francisco, and New York are starting to offer public incentives—tax credits, grants, and streamlined approvals—to make the math pencil out. For Class C buildings in walkable urban cores, a conversion can breathe new life into a dead asset. But conversions aren’t a universal solution.
As an example of creative adaptive reuse, the explosive popularity of indoor pickleball has made it a legitimate driver of repurposing office space. Older buildings with open floor plans and high ceilings are being retrofitted into recreation centers. Courts are cheaper to install than full residential conversions, zoning may be more flexible, and demand continues to grow.
VII. THE ROAD AHEAD: Forecasting What Comes Next
For mortgage professionals and property owners alike, reading the tea leaves has become an essential survival skill. What lies ahead isn’t just a cycle correction; it may be a fundamental reshaping of how we use and value commercial space.
So what can mortgage professionals do in this shifting environment? It starts with rethinking traditional assumptions and adapting strategies to today’s realities.
- Know Your Tenants – In this market, it’s not enough to know the lease term or rent roll. You need to know the tenant’s strategic direction.
- Track Lease Expirations Closely – Mortgage holders need to anticipate vacancies well in advance and factor them into valuations and loan servicing decisions.
- Favor Flexible Zoning and Mixed-Use Potential – Properties located in jurisdictions that allow for mixed-use or residential conversion are more likely to retain long-term value.
- Prioritize Regional Intelligence – As we move into this next phase, those who survive—and thrive—will be the ones who can separate outdated assumptions from actionable insight.
This is a market to approach with care, strategy, and a sharp eye on the road ahead.
VIII. CONCLUSION: Adapting to the New Normal of Less
The era of sprawling office footprints, multi-decade government leases, and the notion that “a signed tenant means guaranteed income” is coming to a close. Today, “normal” means less: fewer workers in the office, fewer lease renewals, fewer large tenants, and fewer buildings that pencil out under old models.
The implications for mortgage professionals are profound. Lenders, brokers, and investors can no longer rely on rearview metrics. Historical performance is no longer a guide to future outcomes.
But in every downturn, there is opportunity. Those who move first to reassess portfolios, reprice risk, and engage with distressed owners will be better positioned to offer solutions when banks pull back.
Every disruption creates a window for innovation. While legacy models are being tested, new approaches are taking shape—more agile, more efficient, more attuned to how people live and work today. For professionals who can spot the signal through the noise, the current disruption may be a chance to help define what comes next.
Odell Murry is the founder and president of MAI Financial Services Inc. He can be reached at omurry@maifunding.com.
