The commercial real estate market may be hard to fill in the future because of the shift to working from home during the Pandemic.

Joseph Gyourko said it was too early to say how the demand for office space would decline. The market will not be the same when those leases end.

He said during an interview with Wharton Business Daily that he thought what would happen was a move to concentration and a flight to quality. Over the next few years, as tenants start to rethink space needs, they will go into better buildings, and the buildings will be in trouble.

The office vacancies went up to a high of 17.2% in the third quarter of 2021. Many companies are calling workers back into the office this year, but it's not likely to be full. Workers are demanding that their employers keep the option of remote or hybrid work because they have proven they can function remotely.

There will be huge variation, but I think people and families want the flexibility of at least a day at home, and bosses are going to have to give it. I don't.

“As tenants start to rethink space needs and their leases rollover, they’ll go into better buildings, and the [worse] buildings will be in trouble.” –Joseph Gyourko

The best office space configurations will be used by companies that offer flexible work. Tenants will struggle to find tenants in older buildings with a lack of amenities.

The professor said policymakers need to plan for a post-COVID future. Older buildings that go dark will be expensive to maintain. The local economy will be hurt by a reduction in workers flooding into office districts. Restaurants, boutiques, and businesses that are close to an office will lose foot traffic that keeps them in the black.

When the real estate, the retail, the restaurants, and the Starbucks around those buildings aren't needed anymore, cities will have to think about what to do with the empty office buildings.

There is a different kind of downtown.

Gyourko said that the makeup of office space will vary by location. Philadelphia, San Francisco, and New York should be able to handle the shock because they have better buildings. The landlords will need to change the spaces they offer.

He said that the building owners and managers would be busy and out of trouble for a while.

“I don’t think we’ll go back to pre-COVID. I just don’t.” –Joseph Gyourko

As rents fall, cities with strong job growth may become more affordable. It is possible that building owners will convert the office space into apartments and condominiums, providing more housing in places without enough and possibly drawing families and others who change the demographic of the city. The transition will be expensive but the cities should be fine in the long run.

He is more concerned about the decline of smaller and mid-sized cities. Revenue from empty office buildings will lead to the decline.

He said that it may not be feasible to convert anything from office to residential. This could lead to a downward spiral in weaker office markets that don't have much natural growth.

The slump in commercial construction is related to the downturn in office Occupancy. Nothing new is being built. Gyourko doesn't think that sector will rebound soon.

It won't change until we figure out what the new demand is.