Just how bad is it? According to Cushman and Wakefield, national vacancy rates have risen from 15.2 percent in Q1 of 2021 to 20.8 percent in Q2 of 2025. National office space absorption rates have been negative for the past 12 quarters, and new office space construction has dropped from 53 million square feet in 2021 to just 6 million square feet for the first half of 2025. [1]
There are four primary reasons for the current office market weakness:
Leasing retrenchment. Ten years ago, many white collar employers were hiring almost as fast as they could and leasing (or building) office space in crazy amounts. The pendulum is now swinging back the other way as employers realize that they have both more people and more office space than they need. White collar layoffs are increasingly common and the focus is no longer on raw growth, but on growth through efficiency (more with less). Office space needs are shrinking accordingly.
Work from home. The impact of the COVID pandemic on remote work has been well documented and as companies realized that they needed fewer workers in the office they also realized that they needed less office space. Many assumed that as the pandemic waned, workers would return to their offices en masse, but that has not been the case despite several high profile companies demanding that workers return to the office full time. In fact, a recent Working Arrangements and Attitudes survey found that employer plans and employee desires for remote work averaged 2.3 and 2.9 days per week respectively. [2] While the difference between what employers and employees want is interesting, the real story in my opinion is that both numbers are well above 2 days per week which means that the push to be back in the office full time is the exception not the rule.
This result is consistent with Kastle System’s 10-city office occupancy barometer based on actual employee access card swipe data. Their barometer shows occupancy levels between 50 and 60 percent on average (compared with over 90 percent before the pandemic). [3] Although employee occupancy levels have inched up over the past couple of years, they show no signs of going back to pre-pandemic levels. Hybrid work schedules are very popular with employees and most employers are willing to accommodate those desires to at least some degree. Consequently, companies are revamping their office space to be more flexible and they are reducing total space requirements.
Artificial intelligence and off-shoring. These two unrelated trends both serve to reduce the white collar head count in U.S. offices. Artificial intelligence, in particular, is a new enough trend that it is hard to predict its eventual impact, but I think it is indicative of the growth-through-efficiency push mentioned above which limits both hiring and office space expansion. The range of tasks given to AI systems or to workers in India, Mexico or eastern Europe has steadily grown over the past few years and shows no sign of slowing down. While I don’t think that mass layoffs are likely in the near term, there has certainly been a chilling effect on total employment and on the hiring of entry level workers in this country.
The declining importance of proximity. There are undoubtedly still a lot of face-to-face client meetings, sales pitches, power lunches and professional meet-ups but the number is a fraction of what it used to be 20 years ago. Back then, it was crucial for many businesses to be physically near their clients, supporting businesses and even their competition. But now, virtual meetings are common and often preferred because they take less time. Social media of various forms can connect people with common interests far more efficiently than meeting after work for drinks. Business data can be shared in milliseconds electronically which means that bankers and auditors no longer have to visit in person to “go over the books.” Finally, globalization means that key decision makers may be spread across states, countries or continents instead of housed at a headquarters building, which makes arranging a face-to-face meeting difficult even if such a thing would be useful. In short, the forces which used to tightly cluster office uses into dense downtowns or edge-city office parks are dramatically weaker.
The net result has been a reduction in office space demand and a subsequent surplus in office space supply, particularly in areas with historically high office concentrations. This has not played out, however, in a uniform, everyone-feels-a-little-pain kind of way. There have been distinct losers in the office market which have led to the addition of “zombies” and “doom loops” to the real estate vocabulary. These two phenomena deserve a deeper examination to understand their impact on our society, economy and the urban form.
To illustrate what is happening with the office market, I am going to use St Louis as my primary example, although I will include other examples as well. This is not because St Louis is in terrible economic shape. It is, in fact, a growing metro area that is thriving in several respects. While it is not exactly booming, the metro population is up 1.5% over the past three years. The metro GDP is growing, job growth is strong, and unemployment is lower than the national average. Per capita personal income has grown by 33 percent over the past five years according to the Bureau of Economic Analysis. [4]
St Louis does have its challenges, however, and they tend to focus on the urban core represented by St Louis City. There the population has been in a long, slow decline and poverty has been a particularly acute problem that has been difficult to remedy.
Zombie Buildings
An office zombie is a building that is almost dead, but not quite. Normally the business world is pretty ruthless in dealing with failure, but for some reason office buildings are often allowed to hang around in zombie status for years while desperate owners, investors and mortgage bankers try to bring it back to life. A building typically earns zombie status by being at least 50 percent vacant. Often the owners cannot lease the space at a rent level which would be profitable because demand is so low that market rent levels have plummeted. This leads to fights between investors and mortgage holders over what limited revenue exists. This, in turn, makes it almost impossible to get agreement over any plan to reinvest in the property to improve its appeal to potential tenants.
Owners cling to the hope that the market will bounce back while bankers “extend and pretend” rather than put mortgages into default. Eventually reality sets in and the true value of the building drops precipitously. At that point a new buyer might emerge to snap up the building at a bargain basement price with a plan to reuse the building for some other purpose that now makes sense given the new valuation. But it is hard for the original owners to accept multi-million dollar losses, so the zombie phase can last for quite some time.
St Louis provides two excellent examples of zombie buildings – so good, in fact, that perhaps they should be classed as “super zombies.” The first is the One AT&T Center (or 909 Chestnut) which is a 44-story office building containing approximately 1.4 million square feet of floor area. AT&T moved its employees out roughly 12 years ago and the structure has been largely unleased and vacant for the past 8 years. The building, which reportedly sold for $205 million in 2006, changed hands again last year for just $3.6 million – an astounding 98 percent drop in value. [5] The new owner is apparently considering converting the building to residential use.
The second example is the Railway Exchange Building, a 22-story structure containing roughly 1.2 million square feet of floor area located just 4 blocks from the AT&T Center. The bottom seven floors of the century-old building were once home to the flagship location of the Famous-Barr department store. The upper 15 stories were used as office space, including the headquarters of the Famous-Barr parent company (May Department Stores). The department store went through a variety of identities and renovations, but eventually closed for good in 2013. Office tenants soon fled the building as well and it has been entirely vacant for the past 10 years. A city-financed appraisal of the building returned a value of $5.3 million and the city offered to purchase the property for that amount. The owner, who had purchased the building in 2017 for $20 million and invested another $30 million for initial renovation work, rejected the offer. [6]
These two examples are particularly mind-boggling because of the enormous loss in value, but they are not all that unusual. Virtually every major office market has similar zombie buildings. Two years ago, CBRE estimated that 7 percent of all office buildings were less than 50 percent leased. [7] Given recent market trends, that number has probably not improved since then. What is perhaps more concerning is that there is a relatively large number of office buildings that are between 50 percent and 80 percent leased – or what we might call “zombie adjacent.” A building that is only two-thirds leased is not in good financial shape and runs the risk of spiraling into zombie territory if things go the wrong way. This is particularly true for large buildings with over 300,000 square feet of space. For those buildings, roughly 30 percent fall into the zombie adjacent zone. If the market recovers soon, most of them will likely survive but if not then the list of zombie buildings could grow rapidly.
So who is losing money when an office building becomes a zombie? The answer is a lot of people all around the world. Many office projects are financed through Commercial Mortgage Backed Securities (or CMBS) which are then sold to investors, pension funds, banks, insurance companies, real estate investment trusts (REITs), and on and on. CMBS delinquency rates have skyrocketed from less than 2 percent in 2023 to over 10 percent currently, matching the previous high that occurred following the financial crisis (2012 - 2013). Since the CMBS process tends to spread the risk pretty widely, zombie office buildings aren’t likely to trigger an economic meltdown, but they are likely to cause a fair number of business bankruptcies in the real estate development world and in the small businesses (e.g. restaurants, bars, dry cleaners, hair salons, etc.) that used to thrive on the employees that worked in those buildings. In addition, zombie offices act as a drag on urban growth, holding back local economies that otherwise might be prospering.
The flip side of this story is that many office buildings are doing just fine. The ones that are doing the best tend to be relatively new buildings that have invested in tenant amenities. In the push to get workers back in the office, there has been a “flight to quality” as companies have either moved to nicer buildings or convinced their landlords to make significant building improvements. Among the top five in-demand amenities are nearby public transit and easy access to parking – underscoring the conclusion that simplifying commutes is high on employee wish lists if their bosses are going to insist on a return-to-work policy.
Older, class B or C buildings which have not kept up are the most likely zombie candidates, but class A buildings are not immune. Factors that are out of the control of building owners may be the final straw that pushes a building into zombie status. A huge, 1.7 million square foot office zombie in the River North neighborhood of Chicago is dragging down the surrounding area and putting other office buildings at risk. Office utilization in River North is 48 percent of its 2019 level, well below Chicago and national averages. [8] One obvious failure can taint an entire district.
In Portland, the precipitating factors likely included the city’s accommodating approach to homelessness and the State’s experiment with drug decriminalization. U.S. Bancorp Tower, a 42-story office building that is now more than 50 percent vacant, is a case in point. When Digital Trends, a major tenant, moved out recently they filed a lease termination lawsuit that included charges of vagrants sleeping in hallways, starting fires, smoking fentanyl, and defecating in common areas. The building is reportedly up for sale with an asking price in the neighborhood of $70 million – approximately 80 percent below what the owners paid for it a decade ago. [9]
Urban Doom Loops
A zombie office building is bad, but a cluster of zombie buildings is much worse. The fear is that multiple zombie buildings could produce a self-reinforcing downward spiral for an entire downtown or office district. The theory goes as follows:
High vacancy rates in multiple buildings causes the number of employees in the area to drop substantially compared with previous times when buildings were full;
The drop in office foot traffic causes nearby retail uses (restaurants, bars, hair salons, dry cleaners, etc.) to go out of business and makes it less likely that the remaining office workers will hang around the area after work;
Property taxes and sales taxes collected by the city fall because empty office buildings have much lower valuations and closed retailers have no sales;
Reduced tax revenue causes budget cuts which force reduced service levels for policing, sanitation, infrastructure repair, and transit frequency;
Closed storefronts, vacant offices, poor service levels and a limited number of people on the street make the remaining office workers feel unsafe and the area is perceived as being on a downward path – which causes more companies to leave the area which deepens the cycle of decline.
This negative spiral was given the name “urban doom loop” by a team of university business professors from Columbia University and New York University. To date the urban doom loop has been more theoretical than real since there are no actual examples of office districts that have gone completely down the drain. There are, however, quite a few cities where office vacancies have soared to levels where the doom loop label is being tossed about. This includes many markets where office development had boomed in the past such as Seattle, Boston, Atlanta, Portland, San Francisco, and Houston.
St. Louis is perhaps the downtown office district that has gone furthest down the doom loop spiral. Just over a year ago the Wall Street Journal did a profile of the downtown area titled “The Real Estate Nightmare Unfolding in Downtown St. Louis.” According to the article the St. Louis central business district had the biggest drop in foot traffic of 66 major North American cities between the start of the pandemic and the summer of 2023. The Journal article focused on a 15-block area where it claimed there were two closed storefronts for every open one. [10] Foot traffic and leasing activity have bounced back somewhat since that time, but the perception of failure and danger still linger.
A recently released study of downtown St. Louis cited the statistic that 25 office buildings in the area are at least 25 percent vacant and that 10 of those buildings – all within a quarter-mile radius – account for 76 percent of all downtown vacancy. In inflation-adjusted terms, average office rents have declined by 14 percent between 2019 and 2024. Similarly, office leasing activity in downtown St. Louis has declined from an average of 616,000 square feet per year (2014 through 2019) to just 152,000 square feet in 2024. [11] The depressed office market has convinced several building owners to convert from offices to residential units. Three such projects have been completed since 2020, three more are in the planning stage, and there is the potential for several more.
Lessons Learned
Fortunately, doom loops are typically interrupted at some point when building values have fallen so far that a new round of investors are willing to take over failed buildings and either convert them to some other use or substantially remodel them so that they can compete in the office market. The problem is that one rescued building is not likely to be enough to turn around an office district in the midst of a doom loop spiral. Multiple investor groups have to rescue multiple buildings at more or less the same time so that the public perception changes from a place of failure and danger to one of exciting new possibilities.
It takes a lot of work to make that shift happen and there is a decent chance that the rescue effort will also fail. Consequently, investors will be interested only if the potential payback is very lucrative – which means that the buildings they are buying have to be dirt cheap. That only happens when the original owners have given up all hope of coming out unscathed.
From the perspective of cities, the zombie/doom loop phenomenon is another lesson in urban dynamics. I think there are at least three things that cities should learn from what is currently happening:
Success is fragile and complacency must be avoided at all costs. Twenty or thirty years ago the office market was booming and downtowns and office parks were being filled with gleaming office towers. City leaders and office developers couldn’t pat each other on the back hard enough and every rock turned out to be gold. Success made us blind to the changes in technology which made remote work roughly as productive as being in the office and to the productivity increases that made many white collar jobs superfluous. Too few people were thinking about what would come after the office boom, they just wanted to get one more office tower built.
Single-use districts are generally a mistake. When the office market was booming, no one wanted to build anything other than office buildings. You couldn’t hardly pay developers to build residential buildings when building an office building was a virtual printing press for money. Unfortunately, the city planning profession was complicit in this mistake by devising zoning rules which made building mixed-use districts difficult. We turned large chunks of our urban core from interesting, self-sufficient urban hearts into sterile containers for workers. We ignored all the other things that cities should do in order to focus on one thing. Healthy cities are a constantly shifting mix of uses and structures, not a monoculture.
Buildings need to be adaptable. Any structure which is built reasonably well will last a long time. In many cases, longer than its original use will last, which means that it may need to be adapted to some other use or be torn down. While tearing a building down is not a disaster, re-using a building is almost always more economically efficient. The problem is that building adaptable buildings is more expensive and if no one is placing value on adaptability, then such an expense seems like a waste of money. This often seems to play out most clearly in smaller cities where the economy cannot tolerate waste. It is common to see houses get converted to small business locations, or vacant supermarkets get converted to churches or medical clinics. Every structure gets re-used until it physically falls apart. That lesson was lost during the office boom when buildings were so optimized for office uses that they are now difficult (i.e. expensive) to adapt to anything else. Yes, some office buildings are being converted to residential apartments but that tends to work only for an older office building that pre-dated the boom (and was built in a more adaptable way), or when the value of a newer building has plummeted to almost nothing.
I would like to say that the office market is rapidly improving and the issues caused by zombie buildings will soon be gone, but alas that is not the case. There are signs of improvement and in some areas new office construction has picked up a little steam. The economy is expanding and employees are gradually adapting to being back in the office. Consequently, many office buildings that are currently on the edge of the abyss will likely survive.
Unfortunately, that is not universally true. In fact, the national office vacancy rate might well creep a percentage point or two higher before it stabilizes and eventually declines. There is still an enormous amount of vacant space – more space, in my opinion, than is likely to be absorbed by normal office demand growth in the next five to ten years. That means that a lot of current office floor area needs to be removed from the market through either conversion to other uses or by being torn down. And by a lot I mean hundreds of millions of square feet.
The most promising path to the goal of floor area removal is through the conversion of office buildings to residential apartments or condominiums, because it not only removes office space from the market but it also increases the supply of residential units to areas that are frequently undersupplied. That can be a win-win scenario for downtowns that desperately need more people on the street for the perception of safety and more disposable income in the pockets of people who might support downtown restaurants, shops and other businesses.
It is not, however, an easy path to follow. To begin with, there is a lot of expense involved with turning office space into residential space. The plumbing and HVAC needs are completely different and it is often difficult to retrofit modern office buildings for residential units. In addition, the resulting rentable floor area and the rent-per-square-foot is often lower by a significant amount. Finally, no one wants to live in an area that is deserted outside the hours of 8 AM to 5 PM which means that multiple projects need to be happening at the same time to convince potential residents to take a chance on living in a converted property. The bottom line is that only some buildings are good candidates for conversion and the economics of the project will only make sense if the value of the building drops substantially from what it was worth during its office heyday.
For better or worse, there are going to be a lot of conversion candidates to consider. Hundreds of billions in office debt will need to be refinanced in the next couple of years. High interest rates and falling office valuations are going to make that difficult, so building owners may be looking for alternatives. In the midwest, several cities are leading the way. Chicago, Cleveland, Cincinnati, Minneapolis and Kansas City have all been active in conversions. That trend needs to spread to other cities and the pace of conversions needs to stay high if the doom loop spiral is to be avoided. I am cautiously optimistic but we are not out of the woods yet.
Notes:
1. “U.S. Office Reports - Q2 2025”; Cushman & Wakefield; July 2025; https://www.cushmanwakefield.com/en/united-states/insights/us-marketbeats/us-office-marketbeat-reports#:~:text=Only%202.3%20msf%20of%20new%20office%20space,four%20markets%20have%20over%201.5%25%20of%20inventory
2. Edward Pierzak; “Office REITS: High Quality Properties Attract and Retain Tenants, Outpace Peers”; January 2025; Nareit; https://www.reit.com/news/articles/office-reits-high-quality-properties-attract--retain-tenants-outpace-peers
3. “Getting American Back to Work”; Kastle Systems; July 2025; https://www.kastle.com/safety-wellness/getting-america-back-to-work/#workplace-barometer
4. “New GDP Numbers Show St Louis’ Economic Momentum Continues”; December 2024; Greater St Louis, Inc.; https://greaterstlinc.com/news/press-release/new-gdp-numbers-show-st-louis-economic-momentum-continues#:~:text=The%20data%2C%20released%20by%20the,income%20divided%20by%20its%20population.
5. Mark Heschmeyer; “One of St. Louis’ Tallest Office Towers, Empty for Years, Sells for Less Than 2% of Its Peak Price”; April 2024; CoStar News; https://www.costar.com/article/642008108/one-of-st-louis-tallest-office-towers-empty-for-years-sells-for-less-than-2-of-its-peak-price
6. Stephen Davis; “St. Louis should be leery of eminent domain as a solution to downtown’s ‘doom loop’ “; July 2025; Pacific Legal Foundation; https://pacificlegal.org/st-louis-should-be-leery-of-eminent-domain-as-a-solution-to-downtowns-doom-loop/
7. “Most US Office Buildings More Than 90 Percent Leased”; August 2023; CBRE Insights; https://www.cbre.com/insights/briefs/most-us-office-buildings-more-than-90-percent-leased
8. Matt Wirz; “The ‘Zombie Buildings’ at the Heart of the Office Meltdown”; April 2025; The Wall Street Journal; https://www.wsj.com/real-estate/commercial/chicago-office-buildings-real-estate-market-1913fe3a?mod=Searchresults_pos2&page=1
9. Peter Grant; “A Fire Sale of Portland’s Largest Office Tower Shows How Far the City Has Fallen”; May 2025; The Wall Street Journal; https://www.wsj.com/real-estate/commercial/a-fire-sale-of-portlands-largest-office-tower-shows-how-far-the-city-has-fallen-322e0f2d
10. Konrad Putzier; “The Real Estate Nightmare Unfolding in Downtown St. Louis”; April 2024; The Wall Street Journal; https://www.wsj.com/real-estate/commercial/doom-loop-st-louis-44505465?mod=Searchresults_pos2&page=1
11. Mary Elizabeth Campbell, et al.; “Reversing an ‘urban doom loop’ in St. Louis through office-to-residential conversion”; March 2025; Brookings; https://www.brookings.edu/articles/reversing-an-urban-doom-loop-in-st-louis-through-office-to-residential-conversion/#:~:text=Annual%20average%20leasing%20activity%20has,2019%20numbers%20(Table%2011).
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