Available Office Space is Declining and Liquidity is Returning to the Sector
Just two years ago it was difficult to find a diversified, institutional real estate investment group willing to spare a word of optimism for the U.S. office market. With office vacancy still at record highs, buyers willing to loudly sing the sector’s praises remain in the minority in 2025. However, a range of indicators for market momentum have been improving since the middle of last year and investor attitudes towards the office sector are gradually reforming.
Higher cap rates on office acquisitions and the stabilization in office space availability are luring investment back and causing lending on office properties to rapidly increase. Considering today’s bullish pricing for stocks, corporate bonds, and higher occupancy property types within commercial real estate, buyers still waiting on the optimal entry point for investment in higher quality office properties could soon be caught looking. Whether it be through direct asset acquisitions, equity recapitalizations, or loan acquisitions, the office sector offers investors generational opportunities to infuse capital while conditions are still dislocated.
Office Fundamentals are Showing Early Signs of an Inflection
- Remote work is no longer proliferating. After a sharp drop in 2020 and gradual rebound from 2021-2022, office attendance has leveled off over the past two years, at between 60-75% of pre-pandemic levels. According to the Bureau of Labor Statistics, in April 2025, the number of fully remote U.S. workers was up only 0.6% year-over-year, about half the pace of overall employment growth. Meanwhile, results from Cushman & Wakefield / CoreNet Global’s What Occupier Want survey conducted in 2025, indicate that nearly 85% of firms have either not changed their hybrid work policy or have increased their expectations for in-office attendance over the past two years. Companies’ long-term plans for continued office utilization via hybrid work policies are solidifying after a period of extreme uncertainty. This renewed clarity is allowing tenants to proceed more confidently with leasing decisions.
- The pace at which tenants are shedding space has slowed dramatically. Amid its weakest four quarter period since the start of the pandemic (Q3 2020 through Q2 2021), occupied U.S. office space declined by 2.3% or 124 msf. Over the past four quarters, the decline in occupied space totaled just 0.6% or 35 msf. With tenants taking a less defensive stance towards their office footprints, U.S. office leasing was up more than 10% year-over-year in the second half of 2024 and preliminary Q1 2025 figures indicate continued double-digit growth. The average lease size has also been growing for nearly two years and has increased by 13% since Q3 2023.
- Total office space listed as available for lease is declining. With demand for office space improving and new construction near historic lows, total U.S. office space listed as available on CoStar has declined for three consecutive quarters, driven by a rapid decline in space available for sublease. Crucially, these improvements are contributing to net operating income performance. According to NARIET, same store NOI reported by office REITs declined just 0.3% year-over-year in the Q1 2025, and has been steadily improving since year-over-year declines reached their recent nadir of 1.8% in early 2024.
Debt Liquidity for Office Deals is Back on the Rise
- 2025 brought the highest first quarter total for CMBS office debt issuance since 2007. The apparent bottom forming in NOI for institutional grade office properties is providing lenders with the confidence they need to begin redeploying debt capital to a sector that has been starved of liquidity for almost three years. This renewed momentum is best illustrated by issuance of CMBS loans tied to office properties which surged to $11.4 billion in Q1 2025, more than triple office issuance during Q1 2024. Debt liquidity is also diversifying across a broadening spectrum of lender types. Debt funds and private lenders have grown increasingly more active, helping to supplement debt availability from more traditional regional and community bank sources.
- Office sales volume has also inflected, and pricing appears to be following. With leasing improving and debt liquidity on the rise, trailing 12-month office property sales volume has been rising since mid-2024, particularly among larger buyers. Combined purchases by institutional investors and public REITs rose by more than 200% in 2024. Industry benchmarks of office pricing produced by Real Capital Analytics, NCREIF, and Green Street tumbled during 2022 and 2023 but have reverted to gains or minimal declines since late last year.
- Investors thirst for yield is likely to drive more investment. Most industry benchmarks show aggregate U.S. office pricing down 22-28% since the Federal Reserve began raising interest rates in 2022. Meanwhile, transaction-based office cap rate indices are in the range of 7.4-8.8%, which is well above current levels of between 5-6% in the apartment and industrial sectors and back into positive leverage territory. Green Street’s unlevered return expectations, which are calculated by applying a discounted cash flow approach to REIT implied cap rates and NOI growth forecasts, have pushed above 7% for the office sector in 2025. This marks the first time the office series has surpassed expected returns in both the apartment and industrial sectors in more than 20 years.
The speed at which office property performance will improve in the years ahead is still uncertain, and we certainly don’t dismiss the possibility that downside risks to the near-term economic outlook could delay the inflections underway. However, under current economic conditions, office space availability and debt liquidity have clearly begun to trend in a more favorable direction for investment.
With the market fresh off a generational reset in pricing, and the worst effects of the shift towards hybrid work policies behind us, the case for office investment is becoming increasingly compelling, particularly for yield starved investors seeking property type diversification. The implications of this shift could be large considering that during the five years prior to the pandemic, U.S. office property sales averaged $157 billion annually, accounting for 31% of sales for the four largest property types combined. Over the past four quarters, those same figures tallied just $59 billion and 17%, respectively. Furthermore, even if the recovery in office properties sales proceeds slowly, there remains a significant amount of loan acquisition and recapitalization activity that will take shape as lenders gradually regain conviction towards the sector.
