We are now stretching into year four of COVID-19’s economic realignment. While the problems facing the industry have not necessarily been solved, they have at least become clearer.

For the office sector, there has been something of a ‘flight to quality:’ Companies, realizing that remote work isn’t going anywhere but people need to be in the office at least some of the time, have opted for smaller but more expensive spaces. Most now operate on a rule of thumb that they’ll need around 60 desks for every 100 employees in a given office. Leases that expired after 2020 were not renewed – instead, companies took the money they’d been using to lease a 100-desk office and instead used it to lease a fancier, 60-desk office. This has left an abundance of offices that are both empty and unsuitable for conversion to residential uses. In the residential sector, COVID-19 has accelerated a “race to the bottom,” where rising costs either force families into entry-level housing or out of the market entirely. A confluence of interest rates and zoning restrictions have created shortages for almost every kind of property. The cost environment has mostly incentivized high-end, luxury residences of all densities. These, by definition, are not meant to be affordable to typical consumers, while affordable housing is, also by definition, not as profitable. The industry remains at a stalemate – needing affordable housing but only building luxury projects – until regulatory changes can realign incentives.

Geographically, remote work has led to growth in smaller cities roughly 1-2 hours’ drive from bigger ones. Places like New Haven, Milwaukee, and Providence have seen population increases from remote workers in New York, Chicago, and Boston looking to stretch their salaries further. More expensive cities have fared less well, either unable to lessen their cost of living or find new uses for their empty offices.

The overall state of the market has not changed significantly since our last report. The cost of borrowing money remains quite high, while the infrastructure and manufacturing sectors remain awash in federal money. Many in the industry are closely watching regulators, eager for any change to existing policy. We expect this to continue into the second half of 2024.