For office landlords, a bad dream that began in March 2020 seems to finally be nearing an end — but only if you’re in well-located, high-end properties in major U.S. markets.
Sales of office buildings across the country totaled $64.3 billion last year, up nearly 21 percent from 2023, according to MSCI Real Assets, a provider of commercial property research. In central business districts, which have suffered from empty buildings and streets long after pandemic stay-at-home orders ended, the pickup was even faster.
Leasing activity is also gaining momentum, according to a report by CBRE, a real estate services firm: In 2024, 6.5 million more square feet of U.S. office space was leased than vacated, the highest amount in any year since 2019. In newer offices in higher-cost markets, like New York, Silicon Valley and Austin, Texas, the average asking rate of $65 per square foot was up nearly 17 percent from the previous year, according to JLL, a real estate services firm.
Sale prices are still declining, but more slowly after years of free-falling devaluation. Last year, the average sales price for U.S. office properties fell 11 percent, according to CommercialEdge, a real estate research organization — an improvement from the 24 percent drop in 2023.
Companies are looking for more office space as work-from-home policies peter out, office landlords and developers said, with many seeking premium buildings with state-of-the-art amenities.
Sales of foreclosed properties and distressed mortgages are also increasing, which could be a sign that investors think assessed values have stabilized enough to take on the risk, suggesting a bottoming of the market.
“We like to buy assets that we think we’ll be able to hold for the long term,” said Connor Kidd, president and chief executive of the Swig Company, which owns offices on the West Coast and in the New York area, “and we’re actively looking at some short sales” — when a property is sold for less than the mortgage amount owed. Lenders are now more willing to allow short sales and sell troubled loans, he said, after months of modifying and extending underwater loans.
In 2023, the Swig Company and SKS Partners bought a 300,000-square-foot office building in San Francisco for about a quarter of its price a few years earlier.
Landlords that own buildings in Manhattan and other large cities, including BXP and SL Green Realty, say 2024 was their best year in a while.
Marc Holliday, chief executive of SL Green, told investors on a recent earnings call that last year was the company’s “third-highest leasing year ever.”
“Throughout 2024, we were signing a lease almost every business day,” he said in an interview.
BXP signed 35 percent more leasing deals in 2024 than the year before, said its chief, Owen Thomas. “Companies are saying, ‘Look, it’s worth it to pay a premium to be in these buildings because we’re going to have more people back in the office, and as a result, we’re going to perform better,’” he said.
Not all office properties are experiencing revived demand. Lower-end buildings are still struggling, which could be a threat to hundreds of banks and investors in real-estate-backed loans.
“The best way to describe the office market is that it’s fragmented,” said Phil Mobley, national director of office analytics at CoStar, a commercial property research organization. “I think the worst is probably over for owners of highly desirable buildings, but nondesirable buildings may continue to lose tenants.”
Indeed, prime office assets ended 2024 with an average vacancy rate of 15.3 percent, compared with 19.2 percent for nonprime office properties nationwide, CBRE reported.
That demand could spread to lower-end buildings as fewer spaces in prime buildings are available and a lack of new construction constrains supply, said Mike Watts, president of investor leasing in the Americas at CBRE. That’s particularly true in robust markets like Miami and Midtown Manhattan, both of which saw vacancy rates drop last year, CBRE said.
“A lot of the prime office space is being absorbed,” Mr. Watts said. “So if tenants can’t find what they need in prime buildings, older buildings that are well located and have good amenities should benefit.”
Even with the early signs of recovery, however, return-to-work orders and moves into bigger office spaces won’t vanquish all of the sector’s woes. Vacancies continued to climb last year in plenty of the largest U.S. office markets with vacancy rates of more than 20 percent, including Atlanta, Chicago, San Francisco and Los Angeles, CBRE reported.
Free rent and other concessions remain part of lease agreements, landlords say, which puts fewer dollars into their pockets than the asking rental rate would suggest.
In higher-cost markets, landlords of newer buildings offered an average of 9.3 months of free rent and one-time tenant improvement allowances of $99 per square foot in 2024, JLL said, whose report looked at 35 U.S. cities. Both of those concessions were an increase from a year earlier and reduced the real or “effective” rental rate to $50 per square foot instead of the $65 asking rate, JLL said.
And despite the rebound in office sales last year, the numbers are still the lowest since 2009 amid the collapse of the real estate debt markets, MSCI Real Assets said. The 2024 sales total was 56 percent below what it was in 2019, the organization reported. Leasing was also still down, 8 percent below what it was in 2019, according to CoStar.
There’s also the question of how much a potential flood of federal office assets into the market may affect sales and vacancy. Already, Elon Musk’s Department of Government Efficiency has slashed 8.5 million square feet of federal agency leases, cutting rent by more than $318.5 million, according to Trepp, a research and data provider focused on commercial real estate, structured finance and banking markets.
The distress has opened a window to opportunistic acquisitions. In February, the delinquency rate on office loans packaged as commercial mortgage-backed securities was about 9.8 percent, the highest of any property sector and up some three percentage points from a year earlier, according to Trepp.
Properties sold at a discount recently include a 944,000-square-foot office property in Chicago that 601W Companies, a New York investor, bought for $63 million, for roughly a third of the price paid in 2018. Norges Bank Investment Management acquired, for $976.8 million, a 50.1 percent stake in eight office properties in Boston, San Francisco and Washington, a portfolio that once was valued around $2.8 billion.
“You can’t time the bottom perfectly, but now is a good time to be a buyer for well-located assets that may need some improvement,” said David Smith, global head of occupier insights at Cushman & Wakefield, a commercial real estate services firm. “It might feel a little risky, but over the next three to five years, they could be really smart bets as the office market stabilizes.”
