Building owners, banks, leasing agents and just about everybody involved in the office real estate market are asking themselves some version of the same question: Just how bad are things going to get? 

Well … possibly pretty bad. The research group Capital Economics is predicting that by 2025, office real estate values nationally will have dropped 35% from pre-pandemic peaks and won’t reach “before times” prices again until 2040.

That means bargains are coming for some tenants, and pain is coming for plenty of others who are not tenants.

Stephen MacDonald’s law firm rents about 4,700 square feet in the Flood Building, a historic office high-rise in San Francisco. He comes in every day, but his 14-person staff is hybrid. The lease expires in about a month, and his landlord really wants him to stay.

“Everything is dropped. First time — I’ve been there, I think, 35 years — first time the rent has ever come down,” MacDonald said.

He said it’s hard to turn down the roughly 20% price cut being dangled in front of him. But … “what it actually leads to in my brain is looking at other opportunities. I’m waiting for it to soften further, and then we might say, ‘Oh my goodness, we could be in that building,'” MacDonald said.

San Francisco has the highest number of ghosted office buildings. Tech jobs that can be done basically anywhere and a severe homelessness problem have sent the overall vacancy rate to nearly 30%, an all-time high.

But the story isn’t much better in other cities, especially for older office space, said economist Kiran Raichura with Capital Economics.

“Unless you’ve got one of the newest, shiniest buildings that has been built in the last 10 to 20 years, then pretty much everything else, even if it’s good quality, is going to suffer quite badly,” Raichura said.

That suffering is in store for the owners of those not-so-shiny buildings, but also for regional banks, a common source of office building mortgages.

For now, loan delinquency rates are just slightly above historic norms. Landlords are getting creative, for example adding a second floor of retail in mixed-use buildings.

But Matt Anderson at commercial loan data company Trepp said he expects late payments to eventually hit highs not seen since the Great Recession.

“It’s like a, you’re in a hot air balloon and you’ve got a gradual leak. I mean hopefully for the market that’s how it turns out, as opposed to a crash,” Anderson said.

Which is what Federal Reserve chief Jay Powell probably worries about when he stares out his office window … or does he work from home too?