Promising Signs Following Years of Gloom
Since 2020, the office real estate market has weathered one of its toughest storms in modern history. The pandemic forced a rapid, unanticipated shift to remote work, and the fallout was immediate. Vacancy rates in many U.S. markets soared—climbing with negative absorption in each quarter of 2022 and 2023 and the first three quarters of 2024. Office property values tumbled with the drop in occupancy, and then as occupancy began to firm, rapidly rising interest rates extended the value declines, with values dropping another 12% in 2024 from already severely depressed levels. Headlines were made by some of the most breathtaking value declines as once highly sought-after properties were sold for a small fraction of their former value.
Yet amid the gloom, there are compelling signs that 2025 could mark the turning point for office real estate investment. We’ll look at the promising signs in the office sector, the remaining challenges in the space, and why we think the office sector presents the most compelling investment opportunity in CRE investment for 2025.
Why 2025 Looks So Promising
One of the most significant change indicators is the evolving approach employers express for workplace strategy. Over the past year, major corporations have increasingly mandated return-to-office policies. With companies like Amazon, Goldman Sachs, and JP Morgan leading the charge, employees are now heading back to the office at an average of four days per week—up significantly from the two or three days that were common in 2021 and 2022. This shift isn’t merely symbolic; it’s leading to a real uptick in occupancy levels and demand for new space. As more companies formalize hybrid or in-person work models, we’re witnessing the return of predictable leasing patterns that reflect normal historical activity levels. Q4 2024 leasing activity was the highest since the pandemic at 92% of its pre-pandemic level.
As activity has begun to solidify, tenants have begun to find competition for the highest quality spaces. A recent CBRE survey revealed that more than one-third of large occupiers plan to increase their office space within the next two years, with an additional 25% expecting to maintain their current footprints. This is the first time this decade more tenants have indicated an expected increase in their space needs than a decrease. It also means that tenant demand—especially for modern, well-located, and amenity-rich office spaces—is beginning to pick up in a market where new construction has slowed dramatically. This long-awaited swing from excess supply toward excess demand means landlords will begin to regain the pricing power necessary to make their office holdings economical.
New office construction has nearly stalled for years with little in the pipeline for the next several years. In many markets, older office buildings are being converted to residential, hotel, or mixed-use properties or torn down to make way for industrial and data center use. These trends mean that we’re headed toward not only a period where the highest quality space has more demand than supply but there are fewer options for tenants to trade down to lower cost options as rates move up on the highest quality space. Research from CBRE and JLL indicates that shortages of Class A office space could emerge as early as late 2025, ushering in this more landlord-friendly environment.
A Cautious Optimism
While the outlook for 2025 is decidedly more optimistic than in recent years, significant challenges remain. Lower quality assets have yet to see signs of relief that the highest tier of assets have and are unlikely to do so until pricing and occupancy tighten further in class A space. In addition, years of elevated inflation have drastically increased the costs of owning properties. At the same time, rental rates stagnated, meaning office lease rates need to rise substantially to bring office income streams back into equilibrium with the associated costs.
The worst may be over for landlords looking for tenants, but the headlines of office troubles will likely continue for some time. Loans made or renewed in the early 2020’s at historically low interest rates continue to roll over with substantially higher payments. Similarly, depressed office values mean even some offices that have weathered the crisis well will still require recapitalization before they can participate in the upswing in the market.
The brutal challenges for the office market that began in 2020 seem to be ending at long last. While risks remain, the factors at play suggest may turn out to be a banner vintage for office investments. The risks still call for a cautious and measured approach, but for those willing to look beyond the headlines, the opportunity is compelling.
