John Watling - Assessing the Commercial Office Sector in 2024

The office sector isn't just experiencing a downturn, it's undergoing a fundamental restructuring that will test our profession's ability to capture market reality. As John Watling reminds us in his recent conversation, letting the data drive our valuations has never been more critical, even when that data points to uncomfortable truths about declining values and systemic changes.

The New Normal Isn't Temporary

Pre-2020, office assessment was straightforward. As Watling notes, we had "historically low vacancy rates, rents were continuing to climb... very little in the way of offering inducements or incentives." The data told a simple story: steady appreciation, robust transactions, and minimal valuation challenges beyond "small rental reductions" and "property specific issues."

Today's reality demands a different approach. With vacancy rates hitting 15-20%, levels not seen since the early 1990s, and actual occupancy hovering around 45-50%, we're not looking at a temporary disruption. This is a structural shift that requires us to fundamentally rethink how we assess office properties.

The bifurcation Watling describes, where Class A properties with premium amenities maintain relative strength while older assets struggle, means blanket adjustments won't work. Each property requires individual analysis based on its position in this new hierarchy.

Financial Realities We Can't Ignore

The $1.5 trillion in commercial real estate loans coming due presents a valuation reckoning. When property owners return to refinance and discover their buildings are worth less than their outstanding mortgages, the market response is predictable: distressed sales, strategic defaults, and in some cases, major operators simply walking away.

"Brookfield, they're walking away from large office buildings because the valuation just isn't there," Watling observes. When sophisticated investors make these calculations, it signals more than individual property distress, it reflects a sector-wide repricing that assessors must acknowledge.

For assessment professionals, this creates a challenging dynamic. We must recognize these market signals without overreacting to distressed sales. As Watling advises, "assessors need to be careful that they're not being swayed by these distress sales or bankruptcy sales." The goal is capturing market value, not panic value.

The Work-From-Home Question Isn't Going Away

Perhaps the most persistent challenge is quantifying the impact of remote work. Despite high-profile return-to-office mandates from companies like Boeing and Goldman Sachs, the broader trend remains clear: systematic reduction in office space demand.

"It's starting to be a hiring issue as well," Watling notes, where prospective employees prioritize flexible work arrangements. This isn't a temporary pandemic response, it's becoming embedded in corporate culture and compensation packages.

For assessors, this means incorporating new variables into our analysis. Traditional metrics like location and building quality remain important, but we must also consider factors like lease flexibility, divisibility of space, and conversion potential. The properties that can adapt will maintain more value than those that can't.

Local Knowledge Becomes Paramount

The office market's fragmentation makes local expertise more valuable than ever. As Watling emphasizes, "it's really important to take a look at and have a good understanding of your geographical location."

What works in Manhattan may not apply in Minneapolis. A building that's struggling in one market might be perfectly positioned in another. This localized approach requires more intensive data gathering, not just sales comparisons, but conversations with brokers, owners, and tenants to understand the nuances driving each submarket.

Revenue Implications We Must Address

Let's be direct about what declining office values mean for local governments. When office portfolios represent 21% of commercial tax revenue in cities like New York, significant value decreases create budget crises.

This reality puts assessors in a difficult position. We must maintain our commitment to accurate valuation even when it means delivering unwelcome news about revenue impacts. The temptation to maintain higher assessments to protect municipal budgets must be resisted, our credibility depends on following market evidence wherever it leads.

Key Takeaways

Data First, Always: "Let the data drive your overall end results," as Watling puts it. Speculation has no place in professional assessment, especially during market transitions.

Prepare for Complexity: The bifurcated market requires property-by-property analysis. Broad categorizations and mass adjustments won't capture the nuanced reality of today's office sector.

Document Everything: With values declining and appeals likely increasing, thorough documentation of our methodology and market analysis becomes essential. Every adjustment must be defensible.

Think Beyond Traditional Metrics: Incorporate new factors like remote work policies, conversion potential, and lease flexibility into valuations. The market is pricing these elements, so must we.

Maintain Professional Distance: Recognize the revenue implications of declining values without letting them influence assessments. Our obligation is to market accuracy, not budget protection.

The office market transformation tests everything we know about commercial assessment. But as Watling's insights remind us, our fundamental principles, careful analysis, local knowledge, and letting data guide conclusions, remain the foundation for navigating this challenge. The market will find its new equilibrium. Our job is to accurately reflect that journey, wherever it leads.