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State of the Office Asset Class









Navigating a Bifurcated Market

The State and Future of the U.S. Office Asset Class

Executive Summary

The U.S. office market is undergoing a fundamental transformation,
having entered a period of selective recovery defined by a profound
and widening bifurcation. While national market fundamentals still
reflect persistent challenges from economic uncertainty and evolving
workplace trends, the sector is no longer in freefall. A new
equilibrium has emerged, characterized by stabilizing utilization
rates and a historically low construction pipeline. This report
provides a detailed analysis of the prevailing market dynamics, key
structural shifts, and strategic imperatives for a commercial real
estate (CRE) audience.

The central narrative of the market is the “flight to quality,” a
dominant movement where tenants are downsizing their footprints but
concurrently upgrading to premium, amenity-rich, and well-located
properties. This trend is not merely a preference but a strategic
business decision to attract and retain talent in a hybrid work
environment. As a result, Class A and prime assets are outperforming,
commanding rent premiums and exhibiting positive absorption, while
older, non-compliant buildings face higher vacancies and a growing
“brown discount” on their value.

The capital markets present a complex picture. Elevated interest rates
and a looming “debt cliff” of maturing loans are creating significant
financial distress for many owners, but this is also generating an
unprecedented window of opportunity. Lenders are increasingly selling
non-performing loans at deep discounts, allowing opportunistic
investors to acquire assets at a lower basis. This dynamic is driving
a strategic pivot in investment—from a focus on broad sector
allocation to one of granular, asset-level selectivity.

Looking forward, the future of the office asset class will not be a
return to pre-pandemic norms. Value creation and preservation will
hinge on proactive and strategic adaptation. The revitalization of
obsolete assets through adaptive reuse, the evolution of flexible
office models, and the integration of robust Environmental, Social,
and Governance (ESG) criteria are no longer ancillary considerations
but non-negotiable strategies for long-term viability. The market will
reward precision over scale, and a deep understanding of sub-market
dynamics and asset-specific attributes will be the difference between
success and obsolescence.

Current State of the U.S. Office Market

The national office market in Q3 2025 presents a complex and, at
times, contradictory picture. While the sector continues to navigate a
challenging environment, there are undeniable signs of stabilization
beneath the surface, revealing a market that is not uniformly
distressed but rather highly bifurcated by location and asset quality.


Vacancy & Class Performance (Q3 2025)


Data based on various Q3 2025 market reports.

National vacancy rates in the third quarter of 2025 varied
significantly across major research firms, a testament to the market’s
fragmentation. Figures range from 14.1% [1] to a new record high of
20.4% [4] and 20.8% [3]. The divergence in performance between asset
classes is stark. While overall Class A vacancy is high, it is
experiencing positive absorption and strong leasing activity, a clear
sign of a hyper-selective market. Tenants are vacating older,
commodity-style office space in favor of truly premium, Class A
buildings.


Construction Pipeline Forecast (2025-2028)


Data based on various Q3 2025 market reports.

The most significant stabilizing force in the U.S. office market is
the ongoing and dramatic reduction in new supply. The construction
pipeline has reached its lowest level in over a decade, a direct
result of elevated interest rates and the high cost of building
materials. This trend is projected to intensify, creating a future
supply drought. Projected deliveries for 2025 are a mere 13 million
square feet, a 13-year low, and are forecasted to drop even further to
11.4 million square feet in 2026 and just 3.1 million square feet in
2027. This provides a clear, long-term roadmap to market
stabilization.

Office-to-Residential Conversions and Adaptive Reuse

As traditional office demand lags, adaptive reuse is surging. The
pipeline of office-to-apartment projects is set to reach a
record-breaking milestone of nearly 71,000 units in 2025, a
significant leap from 55,300 in 2024. These conversions now make up
about 42% of all future adaptive-reuse projects. This trend is
strongest in high-distress markets with chronic vacancies, with the
largest pipelines in metro New York (8,310 units planned), Washington,
D.C. (6,533), and Los Angeles (4,388).


Office-to-Residential Conversion Pipeline (Planned Units)


Data based on RentCafe/CBRE 2025 reports.

In general, vacant urban office stock (especially older high-rises) is
being rethought as housing. Four-year trends underscore this shift:
RentCafe notes that offices targeted for conversion average just 72
years old (20 years newer than prior conversions) – meaning even newer
vintage buildings are now on the docket. Although hurdles remain
(zoning, financing, design challenges), industry experts say the
pipeline is strong and growing.

  • Conversion Pipeline:
    A record 70,700 units are in the pipeline for 2025, up from 55,300
    in 2024.
  • Market Drivers:
    Driven by $150B of maturing office mortgages (2024) and government
    incentives, with apartment conversions now outpacing other reuse
    types.
  • Supply Impact: Many
    tall office buildings have been or will be removed from inventory
    when converted, slightly reducing U.S. office stock even as suburban
    space remains underused.

Investment Trends: Cap Rates and Transaction Volume

Capital markets for office have been volatile. Sales volume plunged in
2023 – CBRE notes a ~51% YoY drop – with a modest rebound (about +9%)
in 2024. Financing costs remain high, keeping many buyers sidelined.
Cap rates tell a similar story: in H2 2024, CBRE finds all-property
cap rates roughly stable, but office still showing upward pressure due
to distress. Roughly half of surveyed investors expect cap rates to
have peaked, but office is seen as the most likely sector to see
further yield increases in the short term. Within office, sentiment is
bifurcated: gateway CBD primes are thought to be turning the corner,
whereas suburban, Class B/C offices carry higher risk premiums.


Office Cap Rates vs. 10-Year Treasury & Transaction Volume


Data based on CBRE CRS and CoStar.

  • Cap Rates: Office
    cap rates have risen above other sectors. CBRE’s H2 2024 survey
    found office yields as the only major sector still climbing. Many
    analysts now view current office cap rates as “at or near peak,”
    though riskier submarkets may push higher.
  • Transactions: U.S.
    CRE transaction volume is improving slightly in 2024, but office
    sales remained low. Aside from entity-level deals, office investment
    lagged broader market—Capex needed to restart deals. The CBRE
    Lending Momentum Index did tick up in 2024, suggesting banks
    gradually returning to office finance (though still constrained by
    rates).

The New Era of Workplace & Tenant Behavior

Hybrid work is no longer an experiment but the new normal for a
majority of remote-capable employees. A May 2025 Gallup poll reveals
that 51% of U.S. remote-capable employees work in a hybrid
environment, while 28% are exclusively remote. Employers and employees
are increasingly aligned on this model, with employers, on average,
expecting 3.2 days in the office per week, and employees attending an
average of 2.9 days.


The “Flight to Quality”


Data based on various Q3 2025 market reports.

Amid reduced demand, the “flight to quality” is a dominant trend. This
movement refers to a tenant-driven shift toward premium, well-located,
and amenity-rich properties. The outperformance of prime assets in
vibrant, mixed-use submarkets like Dallas’s Preston Center and Midtown
Manhattan demonstrates this preference. These prime spaces are
becoming more scarce due to the slowdown in new construction.

Capital Markets and Investment Outlook

The financial landscape for the office sector is defined by persistent
uncertainty, yet it is simultaneously creating a unique and compelling
opportunity for well-capitalized investors. The single greatest
financial challenge is the looming “debt cliff.” A staggering $1.8
trillion in commercial loans is scheduled to mature by the end of
2026, a volume that will test the market’s capacity to refinance and
recapitalize [15]. This distress, however, is leading to an increase
in non-performing loan sales at deep discounts, creating value-add
opportunities.

Strategic Recommendations

For the CRE professional, the path forward is clear: success will be
found by embracing a new playbook centered on quality, technology, and
proactive investment.

  • Prioritize the “Flight to Quality”:
    Focus on modernizing properties with smart technology and wellness
    amenities.
  • Integrate ESG into the Core Strategy:
    Invest in energy efficiency and pursue green certifications to
    command rent premiums.
  • Evaluate Strategic Conversions:
    For aging assets, consider adaptive reuse to residential or life
    sciences labs.
  • Be Highly Selective:
    Avoid broad-based exposure; focus on high-quality assets in
    resilient urban cores and high-growth Sun Belt markets.
  • Capitalize on Distressed Opportunities:
    The upcoming “debt cliff” is a generational opportunity for
    well-capitalized investors to acquire assets at deep discounts.

Appendix: Links to Data Sources