Commercial Real Estate Splits Into Winners and Losers

A Market of Two Realities

The commercial real estate story that dominates headlines is one of decline: hulking office towers sitting half-empty, their values sliding quarter after quarter. Large office buildings have posted a 1.8% drop in value for a second consecutive quarter, according to CoStar's Commercial Repeat Sale Indices, alongside a national office vacancy rate hovering around 18% 1. But that widely repeated narrative obscures a more complicated picture, one in which certain pockets of the office market and adjacent real estate investment trust holdings are quietly thriving even as others collapse under the weight of empty floors and maturing commercial real estate loans.

Where the Pain Is Concentrated

The distress is not evenly distributed. In Milwaukee, the Pinnacle I and Pinnacle II office buildings in the Bishop's Woods office park were sold through foreclosure, the latest in a string of similar forced sales tied to distressed office debt 2. In New Jersey, the shift away from traditional office use has become so pronounced that many office buildings have simply been torn down to make room for warehouses, a physical reflection of how work patterns have permanently changed since the pandemic reshaped commuting and workspace demand 3. Perhaps the starkest number comes from Portland, Oregon, where downtown office vacancy reportedly hit 29.6% in the second quarter of 2026 — a figure so severe that the City Council is now weighing zoning changes specifically designed to make office-to-housing conversions easier 4. Each of these stories, though geographically distinct, points to the same underlying dynamic: aging, poorly located, or amenity-lacking office stock is becoming increasingly difficult to fill, finance, or even justify keeping standing.

The Hidden Winners

Against that backdrop, other corners of the office market are defying the doom-and-gloom consensus. In New York City, Union Square is experiencing what's been described as a frenzy of demand for office and retail space, with recent leasing deals pushing several prime buildings around the park to full occupancy 5. That kind of tightness in a supposedly struggling asset class underscores a bifurcation running through commercial real estate: trophy locations with strong retail synergy and walkability are commanding real demand, while functionally obsolete towers in weaker submarkets are the ones dragging down national averages and vacancy statistics 15.

Why It Matters

This divergence carries real consequences for real estate investment trusts, lenders holding commercial real estate loans, and municipal planners alike. REITs with exposure to distressed office assets face continued write-downs and foreclosure risk similar to what played out in Milwaukee 2, while those concentrated in high-demand micro-markets like Union Square may be insulated or even benefiting 5. Meanwhile, cities like Portland and municipalities across New Jersey are being forced to rethink zoning and land use altogether, treating office-to-residential conversion and outright demolition as viable responses to structurally elevated vacancy 34. The overall office vacancy rate may look grim in aggregate, but the story underneath it is one of sharp geographic and qualitative divergence rather than uniform collapse 1.