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We are witnessing the ‘reverse musical chairs’ of commercial leasing. As a surplus of space floods the market, demand dwindles.

The landscape of commercial real estate, both domestic and international, is undergoing a catastrophic downturn—a fact that has curiously escaped the glaring attention of much of the business press. The sector is currently grappling with a third wave of distress—a metaphorical tsunami that is only now coming into focus for many who are still reeling from the initial wave’s repercussions.

The first tsunami altered the commercial real estate dynamic, as a growing number of buildings hemorrhaged tenants. Efforts to backfill these spaces are proving fruitless. The corporate footprint has contracted dramatically; firms once requiring expansive square footage now settle for a fraction. The anticipated “return to normalcy” has proven to be an illusion.

We are witnessing the “reverse musical chairs” of commercial leasing. As a surplus of space floods the market, demand dwindles. From San Francisco to Boston, the effect varies in intensity, but the resulting paradigm shift has rung alarm bells across the industry.

This shift traces back to 2020’s pandemic-induced work-from-home policies. Many corporations have since maintained a remote workforce segment, which has precipitated a seismic change in the commercial market.

The first tsunami brought heightened vacancy rates; the second, which began in 2022, unleashed a “deluge of debt” across the commercial building sector.

Traditional commercial real estate pundits, blindsided by the change, remain fixated on the aftershocks of the first wave’s higher vacancy rates, failing to anticipate the looming third tsunami: the collapse of building values. The need for foresight in reporting the impending impact of this crisis is urgent.

Valuations of commercial buildings are plummeting as appraisals and sales begin to mirror the harsh reality. Properties that commanded astronomical prices pre-pandemic are now selling for a fraction. A case in point: a San Francisco edifice that fetched $140 million in 2020 was offloaded for a mere $73 million in 2023.

Is this the nadir? Technological obsolescence could see values nosedive further, as global competitors eschew spaces lacking in essential modern amenities like redundant power and broadband connectivity. Bargain hunters may find themselves saddled with depreciating assets spiraling toward an undefined bottom.

The notion of “repurposing buildings” emerges as an inadequate response. The stark technological deficits render many structures unsuitable for contemporary corporate tenants, let alone for conversion into residential or unconventional uses such as urban pig farms.

The appraisal of buildings must evolve to consider their “technological IQ”—a measure I pioneered in 1985 with a test to evaluate intelligent amenities in Seattle buildings. Such assessments could revolutionize comparisons, influencing the insurance and banking sectors.

The commercial leasing industry must pivot to asking, “How smart is your desired building?” with the same ease as they inquire about square footage. Corporate tenants must recognize that a building’s IQ can offer new insights—beyond traditional appraisals—into the intelligent amenities that underpin their operations.

James Carlini is a strategist for mission critical networks, technology, and intelligent infrastructure. Since 1986, he has been president of Carlini and Associates. Besides being an author, keynote speaker, and strategic consultant on large mission critical networks including the planning and design for the Chicago 911 center, the Chicago Mercantile Exchange trading floor networks, and the international network for GLOBEX, he has served as an adjunct faculty member at Northwestern University.