Hughes Marino Warns Office and Industrial Real Estate Tenants of Historic Leverage Window in 2026

SAN DIEGO — Tenant representation firm Hughes Marino is characterizing the current commercial real estate environment as the worst market in more than 30 years, while simultaneously arguing that the conditions create an unusually powerful leverage window for office and industrial tenants. The assessment, delivered by Senior Executive Managing Director and co-founder David Marino in a May 2026 interview on the Market Insider podcast with host Siyamak Khorrami, draws on what the firm describes as on-the-ground observations across the country from conversations with tenants, landlords, and lenders.

Office Real Estate Has Reset, Recovery Years Away

According to David Marino, the office real estate market has undergone a fundamental reset since the onset of the Covid-19 pandemic. He noted that roughly 85% of U.S. companies have had their leases expire since 2020, and the vast majority have downsized their footprints. A company that previously occupied 40,000 square feet may now occupy 20,000. Hybrid and remote work patterns, Marino argued, have become permanent operating models rather than transitional arrangements.

The result, he said, is a national office availability rate of 20% to 30% across most major markets. Marino described this not as a temporary dip but as a durable condition, drawing a historical parallel to the 1997–1998 period when the office market hit bottom and remained there for years before recovering. His current expectation is that most U.S. office markets will remain in this extended equilibrium for three to five years, or potentially longer.

"The behavior is basically set now," Marino said. "Corporate America has really settled into a new normal around office space. The horses are out of the barn and they're never coming back."

For tenants with leases expiring in the next 12 to 24 months, Marino said the market offers a negotiating position that rarely appears in a business owner's career, including free rent packages of six to twelve months, fully funded tenant improvement allowances, and below-market effective rents maintained behind stable face rates.

Vacancy Statistics Understating True Office Supply

A central theme of Marino's analysis is the distinction between vacancy and availability in office real estate reporting. Vacancy, as typically reported by the commercial real estate brokerage industry, measures only physically empty space. Availability includes all space being actively marketed, including sublease space where a tenant is still paying rent but has listed its space for others to occupy.

Marino said there are currently 170 million square feet of office sublease space on the market across the United States. Under standard vacancy reporting, a building occupied by three employees but listed for sublease on 100,000 square feet registers as zero vacancy. He argued this creates a systematically misleading picture of market conditions.

"There's a lot of lying with statistics going on in our industry," Marino said. "People sort of manipulate the data to create a favorable story and a favorable narrative as to why values should be higher than they might otherwise be."

Rather than cutting face rents, Marino said landlords are loading transactions with concessions to maintain the appearance of stable pricing — a strategy that protects reported asset values and lender covenants but obscures the true economics of deals. He cited a recent transaction in which Hughes Marino represented an engineering firm leasing 14,000 square feet. The landlord, who had just purchased the building and was closing escrow, offered an eight-year lease with a full year of free rent in 2027, paid for all tenant improvements, and provided a cash moving allowance, while maintaining a $3-per-square-foot asking rate on paper.

Commercial Real Estate Financing Stress and Lender Restructuring

Hundreds of office property foreclosures have already occurred across the country, concentrated in the last three years, according to Marino. Downtown San Diego alone has seen approximately 11 high-rise office buildings go through foreclosure or forced sale, including buildings from the Irvine Company's downtown portfolio. Similar patterns have unfolded in downtown Los Angeles, San Francisco, and New York.

However, Marino described a parallel dynamic in commercial real estate financing in which lenders are employing creative restructuring tools to keep properties out of formal default. One approach he outlined is loan bifurcation: splitting a non-performing $100 million loan into a $70 million "A" loan that remains performing and a $30 million "B" loan parked on the lender's balance sheet at zero interest. The property owner contributes fresh equity to bring debt service to a manageable level, no foreclosure is filed, and the lender avoids a write-down.

"Nobody's writing about this kind of stuff," Marino said. "But a lender can get creative today."

Marino said he does not believe this dynamic will produce a banking crisis comparable to the savings and loan collapse of the early 1990s, noting that commercial real estate loans are typically distributed across multiple asset classes and many years of maturities within any given bank's portfolio. He nonetheless characterized the financial stress in the sector as real, ongoing, and not fully visible in public reporting.

On the question of office-to-residential conversion, Marino said the trend is more constrained than widely reported. Most office buildings have floor plates 40 to 60 feet deep, while residential code typically requires that no bedroom be more than 28 feet from a window line. Office buildings were also not designed to accommodate the dense plumbing penetrations required for multiple kitchens and bathrooms per floor, and purpose-built residential typically sells for 10% to 20% more than converted office space. Nationwide estimates, he said, put the number of residential units that will come online through office conversion at roughly 75,000, against a national housing shortage ranging from four million to ten million units depending on the source. What is occurring at meaningful scale in infill locations with transit access and strong residential land values, he argued, is demolition rather than conversion. He cited the Irvine Company's plans to tear down two three-story office buildings in San Diego's UTC submarket, totaling roughly 90,000 square feet, to construct two 550-unit apartment high-rises adjacent to a trolley stop.

Industrial Real Estate and Warehouse Market Conditions Worse Than Office

While office real estate has dominated coverage of the commercial real estate downturn, Marino argued that the industrial real estate and warehouse real estate sectors are objectively worse by several measures and have received far less public attention.

He traced the current oversupply to the Covid-era e-commerce surge, when companies including Amazon, Walmart, and Target faced restocking challenges and developers raced to build large-format warehouse buildings ranging from 100,000 to one million square feet. Between 2020 and 2025, approximately 1.2 billion square feet of new industrial space was built across the United States, compared to a typical pre-Covid annual delivery of between 20 and 50 million square feet. By 2023 and 2024, e-commerce demand had normalized and companies that had over-leased during the boom began returning space to the market.

Today, Marino said, there are 250 million square feet of industrial sublease space available nationally, exceeding the 170 million square feet of office sublease space that has driven most of the sector's coverage.

"While people instinctively feel the office space market is sick, industrial is worse," Marino said. "Every industrial market today in 2026 is two to three times higher availability rate than pre-Covid."

Nowhere is the industrial correction more acute than the Inland Empire, the logistics hub east of Los Angeles. Pre-Covid, the Inland Empire industrial availability rate sat around 7%. By 2022, at the height of e-commerce-driven demand, it compressed to approximately 2%. Today, Inland Empire industrial availability stands at approximately 14%, double the pre-Covid rate. Marino said he does not believe the bottom has been reached.

"I do think it'll continue to get worse," he said. "I don't think the bottom is here yet."

Despite the supply overhang, industrial rents have not fallen to levels that basic supply-and-demand logic would imply. Rates that were roughly $0.75 per square foot pre-Covid peaked near $1.75 per square foot in 2022 and sit today around $1.00 to $1.10 per square foot in the Inland Empire — still materially above where supply conditions would suggest they should be. Marino attributed this to landlords who financed acquisitions and construction at peak valuations and cannot cut rents without breaching loan covenants or forcing write-downs, as well as to a brokerage community that predominantly represents landlords and has an economic incentive to maintain higher face rates.

"There's no transparency in my industry," Marino said. "Business owners and CEOs making real estate decisions are a little ignorant. That's why I get on these shows, to try to educate business owners."

Hughes Marino, which specializes in representing tenants and buyers rather than landlords, said the gap between what landlords are asking and what the market should bear in the industrial sector is wider than in the office sector, and that as more sublease inventory comes online, conditions for tenants are likely to improve further. The firm said its industrial tenant representation team is actively navigating these conditions on behalf of occupiers nationwide.