After four challenging years, the US office real estate market began a fragile recovery in late 2024. But the momentum is now being tested by the Trump administration’s trade, immigration, and fiscal policies, raising questions about the sector’s long-term stability.
Precilla
Torres
Christopher Hodge
Thibaut Cuilliere
Thierry
Cherel
Romeo
Yombo
In our latest webinar, Precilla Torres, Head of US RE&H Finance, Christopher Hodge, US economist, Thibaut Cuilliere, Head of Sector Research, Thierry Cherel, Real Estate Specialist, and Romeo Yombo, Real Estate specialist, examine the uneven recovery seen in the US office real estate.
Return to the office
Office real estate was one of the markets hardest hit by COVID-19 shutdowns in 2020 and the decreased levels of office attendance that followed. However, in the second half of 2024, the market finally reached an inflection point due to increased leasing activity and a significant reduction in renewals. Indeed, with increased net absorption and decreased availability over three consecutive quarters, the market appeared to approach the bottomand was on a path to recovery by the end of 2024. Certain sub-markets saw positive trends, with almost half turning positive in net absorption in Q4 2024. This trend is underpinned by companies turning from contraction to expansion on US affiliate buildings, alongside a more structural trend of increasing office attendance (now at one-third below pre-COVID levels).
Healthy market indicators were followed by the return of some equity to the sector. In 2023, there was a lack of liquidity in equity and debt markets; however, in 2024, things began to thaw in debt capital markets. This was especially noticeable in conduit and single-asset-single-buyer (SASB) markets. For conduits, the inclusion of high-quality office transactions with stronger cash flow was a sign of progress, albeit, requiring deep diligence and approval from “B piece buyers”. The return of SASBs for office assets signaledthe beginning of relatively efficient sources of office finance, having returned to the market with ~US$10bn of issuances in Q1 2025, after a complete absence in 2023.
Capital market spreads which reflected tightening trendsince early 2024, albeit recently widening due to market volatility, provided support for most efficient leverage options for the sector. However, these positive indicators are being shaken by the White House’s unpredictable policy agenda.
Policies threaten healthy markets
Despite the positive recovery seen in 2024, confidence in the US office market is being challenged by the policy disruptions introduced by the Trump administration. Cracks are already appearing as net absorption returned to negative in Q1 2025.
A lack of clarity on trade policy is hurting the US economy as growth forecasts are downgraded and tariff uncertainty continues to rattle the equity and bond markets. Interest rate cuts are being pushed back to account for the inflationary impacts from tariffs, which are expected to peak between May and July. This degree of macroeconomic instability will likely slow down the recovery in office real estate seen in the second half of 2024.
In a more direct hit to the office real-estate sector, the Department of Government Efficiency (DOGE) plans to terminate over 679 office leases and divest from 400 properties as part of a sale and leaseback initiative. Although these cuts are spread throughout the US, they are expected to have an outsized impact on the Washington DC area, including Southern Maryland and North Virginia, where federal occupancy is high.
These pressures come amidst historic discounts on once sought-after properties, including 285 Madison Ave in New York, which sold in July 2024 for US$300m, down from US$610m in August 2017. Discounts are more pronounced outside prime markets.
Looking ahead, recovery is set to continue disparately across regions. Factors like net absorption, trends in vacancy and rental growth, hybrid working rates, and government interventions will determine how well their office real estate market will recover.
Top cities buck the downturn
The picture is not entirely bleak, however, and some cities are showing very positive indicators for office recovery and growth. Analysts at Natixis CIB weighed a range of factors to produce a scoring grid of A-class cities to identify the best investment opportunities in offices. There were three standouts:
- Miami has low vacancy rates matched with positive net absorption, record rents, and strong demand for grade A space. Although unemployment has risen, its strategic location for business with Latin America and a nominal yield of 10.2% make it the most attractive location to take advantage of a recovering office real estate market.
- Meanwhile, Nashville is emerging as an interesting market to invest in. With vacancy rates below the national average, high absorption, a diverse economy covering healthcare, tourism, and entertainment, and a nominal yield of 10%.
- Finally, Boston shows characteristics that make it less exposed to market headwinds. A low vacancy rate, high office attendance, growing asking rent, and strong tenant retention lend themselves towards a positive investment thesis.
While these cities are not immune to risks associated with policy, there is also a global trend of stabilisation in the office market, shown by the real reduction in the downsizing episode. The White House also risks jeopardising the market through bad monetary policy by making investors doubt the safe-haven status of the US Treasury note, as it did after Trump’s Liberation Day. Risk could pass onto the office real estate market if treasury yields drive rates beyond office cap elasticity, which is maintained at 0.25-0.3%. However, given Trump’s reverence for treasury yields, the greatest risks remain his trade and domestic policies.
The US office real estate market seemed to finally be making a landing. However, due to macroeconomic uncertainty and austere labour, trade, and spending policy, it does so on uneven terrain, with regions facing divergent recovery prospects. By focusing on vital signs for strong and prolonged recovery – seen in cities like Miami, Nashville and Boston – investors can capitalise on the beginnings of a potential market rebound.
