It’s been a tough five years for office owners and investors. After Covid closures, the work-from-home and hybrid trends, followed by rising prices, elevated inflation and interest rates all caused pain. The good news is that the market may have hit bottom.
Although not everywhere.
But there’s been a rebound, at least for Class A and A+ properties in top metros, according to a Colliers ranking. This comes after office reached bottom in 2023, with Colliers calling the asset class a “leader in year-over-year sales gains.”
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The top markets are names that come to mind quickly: Manhattan ($7.6 billion, up from $5 billion); Los Angeles ($3.7 billion, equal to 2023); Boston ($3.2 billion, up from $2.6 billion); Dallas ($2.9 billion, up from $2.5 billion); Washington, D.C. ($1.9 billion, up from $1.4 billion); Houston ($1.8 billion); Atlanta ($1.8 billion, rising from $1.2 billion); Miami ($1.8 billion, gaining from $1 billion); Phoenix ($1.7 billion, down from $1.8 billion); and Austin ($1.6 billion, up from $900 million).
Office demand has been on the rise as return-to-office policies take effect, according to Marcus & Millichap national director of research and advisory services, John Chang. Momentum is building, with the first positive post-pandemic absorption occurring in the second quarter of 2024, followed by the levels increasing during the final six months of the year.
In the company’s 2024 Q4 earnings call, SL Green Realty chief executive officer Marc Holliday said, “We finished the year strong with 188 individual leasing deals totaling 3.6 million square feet. That's our third-highest leasing year ever.”
“We leased over 5.6 million square feet for all of 2024, which was 35% greater than 2023 and the average term for over 291 leases completed in 2024 was just under 10 years,” said BXP Chief Executive Officer Owen David Thomas in the company’s Q4 2024 earnings call. “Though the fourth quarter is usually our most productive leasing quarter due to year-end seasonality effects, momentum is clearly building in the market and our leasing results.”
Also, while just over half of the top 100 office lease renewals in 2024 were for the same amount of space as before, a third were for larger spaces. The total amount of space leased also rose by 2.1 million square feet to 28.9 million square feet compared to 2023.
Lenders and investors are also acting as one might expect at a market bottoming — increasingly allowing short sales and troubled loans, according to The New York Times.
“We like to buy assets that we think we’ll be able to hold for the long term,” Connor Kidd, president and chief executive of The Swig Company, told the Times, “and we’re actively looking at some short sales.”
More than a third of known office sales in 2024 were purchased at a discount, up from 2023, and prices plunged 11% amid rising distressed sales. The special servicing rate for office in February was up 108 basis points month-over-month to reach 16.19%.
There’s some potential good news for properties that aren’t top-tier. “A lot of the prime office space is being absorbed,” Mike Watts, president of investor leasing in the Americas at CBRE, told the Times. “So, if tenants can’t find what they need in prime buildings, older buildings that are well located and have good amenities should benefit.”
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