Office financial difficulties persist across the country, with nearly $12 billion in new loan distress across the asset class emerging during the second quarter. But a greater volume was resolved, bringing overall volume down from a decade-long high and signaling a slowdown in the pace of accumulation, according to a Savills Research & Data Services Q2 office market report.
As of the second quarter, about $122 billion in CRE loans were in distress, the highest level since 2012. An additional $76.4 billion in existing office loans have been identified as potentially distressed. Savills said the sector should expect additional lender-facilitated sales, deed-in-lieu of foreclosures and foreclosures in the short term.
Despite signs of improvement in the office market, the overall outlook remains clouded by broader economic uncertainty stemming from trade tensions, inflation, elevated interest rates and a slowing labor market, said the report.
Leasing momentum that began building last year extended into the first half of 2025, resulting in the strongest first-half performance since 2019 at 55.8 million square feet. New leases and relocations have accounted for the majority of leasing activity so far this year and leasing activity in suburban markets continues to outpace activity in central business districts as it has since 2020.
Office traffic has yet to visibly increase this year despite growing momentum around return-to-office initiatives, plateauing at about 66% in May. Miami’s occupancy has nearly returned to pre-pandemic levels, while West Coast markets continue to lag. A new wave of corporate RTO mandates could drive higher attendance heading into the fall, according to Savills.
The financial services and insurance sector leads office demand across the country, followed closely by the technology, advertising, media and information sector. Legal services leasing was also up year-over-year, while retail, government, professional services, energy and utilities, healthcare and manufacturing were all down.
Office availability stood at 24.5% during the second quarter, down slightly from 24.8% last quarter and 25.2% year-over-year. Nearly two-thirds of the markets Savills tracks recorded a decline in availability compared with a year ago.
Overall asking rent was $43.23 during the second quarter, up just slightly from $43.05 during the first quarter and $42.78 during the second quarter of 2024. Class A asking rent was $47.14, up month-over-month from $46.87 and year-over-year from $46.35. Rents in the trophy Class A segment appear to be declining, but this reflects the leasing of top-tier space previously priced at a premium, which no longer influences asking rents and is not a true drop in pricing for the segment, according to the report.
Available sublease space fell from 142.8 million square feet during the first quarter to 138.6 million square feet during the second quarter.
The new office supply pipeline is now at its lowest level in more than a decade, with only 21 million square feet expected to be completed this year. By 2028, only 1.2 million square feet is expected to be under development, Savills said.
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