There was a time when talk of the “retail apocalypse” was so prevalent that one might have assumed every shopping mall in the country was about to be boarded up and our only choice for buying items would be putting in an order at Amazon. Clearly, that discussion was hyperbole. Many malls did shutter, but others are thriving to this day. Amazon is ubiquitous, but other retailers are growing, too. Still, it is also true that a lot of disruption occurred in between the events that prompted the “apocalypse” chatter and the firmer ground where retail real estate stands today. Recalling how these events played out is helpful in understanding the situation facing U.S. office properties. The shift to e-commerce was the seismic force that threw off the balance in the retail sector. And it didn’t help that companies had built more stores than were really needed. For office buildings, the pandemic knocked things out of whack. The United States may let its Covid-19 national emergency order expire on Thursday, but worker expectations won’t easily go back to where they were in March 2020. This is particularly true in the cities where the virus struck hard like San Francisco, Seattle and New York. Employees there have embraced hybrid and remote working arrangements. The shopping malls that fared the best as e-commerce changed consumer behavior shared many characteristics. Labelled class A malls, these properties could fetch around $1,000 per square foot from their upscale retail tenants in 2020. By comparison, so-called class C malls were being paid about $320 per square foot. Many class A malls were newer and were built in areas with growing populations. Some had popular designs, such as an open-air shopping center, or a mix entertainment and dining options alongside retail stores. Industry experts are seeing the same kind of divide in the office space. Tenants want newer buildings, with spaces where employees can gather casually. They also are drawn to “green” buildings that have more sustainable features, and can help companies reach net-zero carbon emissions goals. As the value of the “unloved” malls plummeted, some real estate developers looked to retrofit these properties to attract new tenants. Some went further, repurposing the property for other uses such as a health clinic or warehouse . The same idea is being discussed for office buildings, but one-size will not fit all. Developers know it will be costly to repurpose an office building and changing zoning can stall a project. Peter Merrigan, CEO and managing director of global real estate private equity firm Taurus Investment Holdings, said he has seen many of these cycles in different segments of the CRE industry. In some cases, the situation needs to get much worse before it gets better. In the case of shopping malls, there were times when a strip mall could be revamped by removing smaller tenants then redesigning the space to fit the needs of a larger retailer. But, Merrigan explained, there needs to be demand for the space so that several different retailers will be bidding on it. If there isn’t that kind of demand, the property will languish and go to land value. “The old format just didn’t work anymore, so then you have to rezone it,” he said. Merrigan said there may be parallels to what’s going on in office, or maybe the labor market conditions will change and companies will gain enough leverage to bring employees back to the office. “I think if we go through a major labor market correction and this dynamic remains after that, then I’ll buy into the fact that this work-from-home dynamic is permanent,” he said. For those who are worried about the ripple effects that could happen if too many landlords walk away from office buildings, another lesson can be drawn from the shake out among malls: it has taken many years to play out. In fact, it still is. In April, the two biggest CRE loan losses involved shopping mall properties in Arkansas and Guam , according to real estate data tracker Trepp. Finding the risks Still, the market remains on alert. Finding the risks can be tough because CRE is a huge category and the threats will vary widely by property type and location. “While segments of U.S. office face clear challenges, conditions are very different over in London, where a supply crunch looms for West End office,” Osmaan Malik, an analyst at UBS recently wrote in a research note. “Within markets, a flight to quality is under way.” Malik cited CBRE data that shows for U.S. office, 80% of occupancy loss between 2020 and 2022, was driven by just 10% of the buildings. There certainly will be more defaults ahead as landlords “hand back the keys” on some properties, Malik said. And this scenario will play out even if the landlords have reliable access to capital and continue to make new investments elsewhere. Credit is tighter A lack of access to capital can make the situation worse. Signs are evident that a tightening is occurring. “The signal from the [commercial mortgage-backed securities] market, which, in our view, is the most real-time barometer of investor sentiment, clearly points to a slowdown in commercial real estate lending, with stricter terms, punitive financing costs, and reduced appetite for office properties,” Goldman Sachs analyst Lotfi Karoui wrote in a research note on Monday. Karoui said bank data doesn’t show a notable shift yet, but he expects financing conditions are “challenging” nonetheless, and will extend the downturn in CRE transaction volume that’s been seen so far this year. Goldman research shows CRE transaction volumes were at $62 billion at the end of the first quarter, down 65% from the same period a year ago. The analyst has also noticed that among the deals that are getting done, lenders are taking on less leverage. The average loan-to-value ratio is 51% since Silicon Valley Bank’s failure in early March, compared with a post-Covid average of 60%, he said. And what types of deals are getting done? There may be no surprise that there has been a huge drop-off in the number of loans with office properties as collateral since March. According to Goldman and Trepp research, about 19% of the loans newly issued were secured by office buildings, compared with a three-year average of 32%. VNO’O YTD mountain Vornado shares have fallen more than 38% since the start of the year. Instead, there has been an increase in retail and industrial property loans, which have seen “firmer fundamentals” in recent months, Karoui said. All this is to say, that after some adjustment, there will be opportunity. In late April, Vornado Trust , one of New York’s largest owners of office and retail assets, suspended its dividend. UBS analyst Solita Marcelli warned that it wouldn’t be the only office REIT to take this step. However, Marcelli said that investors with a two-year time horizon could take advantage of “attractive opportunities that are emerging” in industrial, residential rentals, self-storage, data centers, wireless towers and grocery-anchored shopping centers. —CNBC’s Michael Bloom contributed to this report.