New Jersey’s office market is facing a compounding crisis that shows no signs of a swift recovery. Nearly six years after the pandemic permanently altered how businesses use workspace, vacancy rates across the tri-state area remain stubbornly above pre-pandemic levels — and now, a new layer of pressure is emerging. Lenders are tightening their grip on office property financing, demanding proof of active leasing before moving forward. According to Stephanie Dominguez, Partner of Tax at WilkinGuttenplan, the financing bottleneck has become a structural problem that tax planning strategies alone cannot resolve. For NJ investors still holding or eyeing office assets, the calculus is growing harder — and the time to reassess is now.
Office Vacancy Crisis Persists
Nearly six years after the pandemic reshaped how companies use workspace, New Jersey’s office market has yet to find its footing. Vacancy rates remain persistently above pre-2020 norms, with no clear timeline for a meaningful recovery. Unlike other commercial real estate sectors that have bounced back, office properties across the tri-state area continue to struggle with weak demand and low occupancy.
The situation in New Jersey is noticeably different from that in nearby markets. While New York City has seen a more visible push to bring workers back, New Jersey has lagged. “Office never really quite recovered to where it was in our area,” says Dominguez. “In New Jersey, it’s probably close to where it was before COVID — not quite. There’s a lot more vacancies.” For investors still holding office assets, that persistent gap between expectation and reality is becoming increasingly difficult to ignore.
Why Banks Are Pushing Back
The financing environment for office properties has grown significantly more restrictive. Banks are no longer willing to underwrite office deals based on historical performance or optimistic recovery projections. Instead, lenders are demanding hard evidence — active leases, concrete tenant commitments, and a credible plan for stabilizing occupancy — before moving forward.
“The banks are really pushing back and wanting to see new leases and wanting to see what the plan is,” says Dominguez. “It’s just becoming a lot more difficult and slower to get that financing process done.” The result is a deal pipeline that has slowed considerably across the tri-state area. Transactions are taking longer to close, and some are failing to reach the finish line altogether. In a market already contending with weak occupancy and uncertain demand, the added friction of a more cautious lending environment is compounding the pressure on office property owners and buyers alike.
Structural Decline, Not Cyclical Dip
What sets the current office market apart from previous downturns is the nature of the problem itself. Past slowdowns were largely cyclical — tied to interest rate movements, economic contractions, or temporary shifts in demand. Today’s challenges run deeper. Lender skepticism is rooted in long-term doubts about whether office space, as an asset class, will ever fully reclaim its pre-pandemic demand profile.
The contrast with other asset classes is striking. Industrial and warehouse properties are experiencing none of the same financing friction, with strong occupancy trends and willing lenders. “The office sector is one of the sectors that’s not as strong as, say, industrial and warehouses are doing right now,” Dominguez notes. The divergence makes clear that the office sector is not simply waiting for a market turn. Lenders appear to have already made a fundamental reassessment of the asset class’s long-term viability — and investors are being forced to reckon with that reality.
Investors Quietly Exit Office Assets
Faced with tighter lending conditions and uncertain occupancy outlooks, investors are making a calculated decision to reduce office exposure. Rather than waiting for conditions to improve, investors are redirecting capital toward asset classes where lender appetite remains strong — industrial, multi-family, and mixed-use properties chief among them. Broader transaction activity has picked up across the market as well, signaling that investors are not retreating from real estate altogether — they are simply becoming far more selective about where capital is deployed.
One notable trend is the rise of installment sales as a practical workaround in a tightening market. In an installment sale, the seller finances part of the purchase directly. This allows a transaction to close without requiring the buyer to secure conventional financing on the same timeline — offering meaningful flexibility when lender conditions are restrictive. Dominguez confirms a recent increase in these arrangements, pointing to a market quietly adapting to the new financing reality.
Hospitality assets are also seeing a quiet exit. Investors have become more motivated to sell off hospitality assets in favor of more straightforward real estate investments. “Hospitality is a bit more of a labor-intensive investment to actually operate,” Dominguez explains, adding that as the broader real estate sector performs well, investors are streamlining their portfolios accordingly.
When Tax Strategy Falls Short
For years, tax-efficient structures such as 1031 exchanges, opportunity zone investments, and partnership arrangements have been reliable tools for real estate investors looking to optimize their portfolios. In the current office market, however, those tools have a critical limitation: they cannot substitute for a lender’s willingness to underwrite a deal. When financing stalls or falls through entirely, the tax strategy becomes irrelevant — and no amount of structural sophistication on the tax side can compensate for a deal that cannot get funded.
The sequencing of decisions matters more than ever. “The tax can’t drive the investment decision,” says Dominguez, reflecting the guidance she provides to clients navigating these conditions. “It has to be a good investment first — we can’t just invest in an opportunity zone to defer a gain and get a good tax answer. It has to be a good investment, and then be a good tax answer.” In today’s office market, that principle carries particular weight. Investors who lead with tax strategy before confirming financing viability risk investing significant time and resources into a deal structure that may never materialize.
On a more encouraging note, a recent relaxation of IRS interest expense deduction limits for tax year 2025 has provided some relief to real estate investors. “That rule was relaxed a bit for tax year 2025,” Dominguez notes, “so we’re seeing a little pressure come off, and that’s helping alleviate some of the financing pressure.” A change that eases the burden without resolving the underlying structural problem — but a welcome development nonetheless.
Aligning Tax With Financing Realities
The practical takeaway for NJ investors and their advisors is clear: tax strategy and financing strategy can no longer be treated as separate conversations. In a market where lender standards for office properties remain elevated, and vacancy rates show little sign of easing, the two must be evaluated together from the outset. Leading with tax planning before confirming financing viability is a sequence that the current market no longer supports.
For residential investors, there are still pockets of opportunity worth exploring. PILOT agreements — Payment instead of Taxes — allow qualifying residential projects to significantly reduce their real estate tax obligations through township programs, offering a meaningful planning advantage in select submarkets across New Jersey.
Looking ahead, the ongoing debate around the SALT deduction cap remains a closely watched issue for high-income taxpayers across New Jersey and New York, two of the highest real estate tax states in the country. “That’s always a very hot topic of conversation,” says Dominguez. “Investors want to know what’s going on there.” With no major legislative changes expected in the near term, the focus should remain on navigating the current landscape with clarity — ensuring that every investment decision is grounded in both sound financing and smart tax planning. In today’s tri-state office market, that integrated perspective is now essential.
