Office Outlook

The U.S. office market faces challenges with a high vacancy rate of 20% in 2024 (source: Moody's Analytics)³⁵, driven partly by an evolution to hybrid work. Premium office spaces in prime locations are expected to fare better, but broad uncertainty makes investment decisions challenging. Year-over-year office transaction activity has dropped by 37%, according to MSCI Real Capital Analytics³⁸, and significant price reductions are evident even in prime locations³⁷, indicating a major market repricing. Despite some relative clarity on pricing, uncertainties remain about future occupancy, loan expirations, financing challenges, and future demand.

Based on recent Moody's Analytics report, the U.S. office market fundamentals are bleak, with vacancies reaching an all-time high of 20% in 2024 due to negative cumulative absorption.³⁵  According to CoStar, the market has seen a decrease in occupied space by almost 205 million square feet since April 2020, meaning that the pandemic-related remote work trend created a loss roughly four times greater than during the Great Recession and nearly triple the decline following the dot-com bubble.³⁶ The reduced office demand is also partly due to the general downsizing trend. For example, new leases in the past six quarters took 15-20% less space than what was typical from 2015-19.³⁶

Even with the overall low demand for offices, we expect higher-quality assets (Class A and Class A+), especially in prime³⁷ office locations, to stand out in leasing activity and demand in contrast to lower-class offices (Class B or lower class).

Despite price discounts, viewing the current office market as broadly appealing for investment today would be simplistic. Factors like the uncertainty around future occupancy rates, upcoming loan expirations, and the difficulty in securing financing due to perceived risks—including the anticipated impact of expiring pre-pandemic leases without a clear view of future demand—will make investment decisions challenging in the near term.

As tracked by MSCI Real Capital Analytics, year-over-year office transaction activity experienced a significant 37% drop, compared to a 39% decrease in the broader CRE market.³⁸ Faced with demand uncertainties and strict lending standards, we expect the office market to remain subdued compared to pre-2019 activity.

Interestingly, we have observed that recent sales reveal significant discounts on their peak valuations and previous sale prices across the board. For example, a Class A office space in Lake Union, Seattle, 1000 and 1100 Dexter sold for $47.5 million in 2024, marking a 26% reduction from its sale price 20 years earlier.³⁹ Similarly, Market Square in Washington, D.C., saw its per-square-foot price halve from its 2011 value in a recent sale to Blackstone in 2024.³⁹ Such significant markdowns in prices, even in prime office locations, suggest that offices are going through major repricing.