Cities around the world were transformed into ghost towns as the devastating impact of the pandemic took hold. While many cities have managed to regain some of their former hustle and bustle, a closer look inside the office buildings reveals a different story.

The rise in office vacancy rates in major cities is becoming a cause for concern, as investments in commercial real estate continue to decline. However, the implications of this shift extend far beyond the realm of team-building exercises. The repercussions can be felt in cities' tax bases, commuter and retail spending, as well as the overall health of financial lenders.

Let's dive into some preliminary data from researcher CoStar, as reported by the Financial Times. In New York City, office vacancy rates have surged to 13% from the pre-pandemic rate of 8%. Similarly, Chicago has seen a rise from 12% to 16%, while San Francisco has reached a two-decade high at 20%. The situation isn't much better in the UK, with London and Manchester experiencing vacancy rates of 10% and 9.5%, respectively.

The impact of reduced office occupancy extends beyond the office buildings themselves. The New York Times reports that New York subway ridership is still hovering at around 70% of pre-pandemic capacity, which poses a significant challenge considering that fares contribute one-quarter of the transit system's budget. In San Francisco, downtown businesses can no longer rely on a surge of office workers at the end of the day, prompting the city to consider the creation of "entertainment zones" similar to those found in New Orleans and Austin, Texas. These zones would allow for drinking, art performances, and street vendors in specific public areas.

Furthermore, smaller regional banks are also facing a threat due to the current situation. As reported by The Wall Street Journal, the global commercial real estate market is valued at an astounding $20 trillion, with 80% of its debt held by regional banks. Each month, five to ten office towers are at risk of defaulting due to low occupancy, expiring leases, or maturing debt that would need to be refinanced at higher interest rates, according to Manus Clancy of data firm Trepp.

Some economists are drawing parallels to the 2008 financial crisis. Philip Pilkington shared his views in Newsweek, suggesting that rising interest rates and high vacancy rates could turn commercial real estate loans into "toxic waste" that would ultimately end up on the government's balance sheet.

The return to office is a topic of debate, with companies like Amazon and Meta now requiring employees to come to the office at least part of the week, while Goldman Sachs expects its staff to be present for the full five days. According to a report by Resume Builder in August, 90% of companies surveyed stated that they plan to return to the office to some degree by the end of 2024. Some organizations may even use office presence as a metric for employee performance evaluations, and approximately one-third of the 1,000 respondents revealed that they would consider terminating employees who fail to comply with the office policies. However, such measures may not necessarily help in filling up the vacant offices.