Stronger income prospects are beginning to brighten the office outlook, with capital markets loosening and demand returning across most markets, according to CBRE. Even lower-tier office buildings, which have been under the heaviest strain since interest rates began climbing, may be poised for improvement.
CBRE tracks office yields by market, submarket type, risk profile, and property class, measuring cap rate movements across two halves of each year. Estimates for Class B and C office properties in 36 markets show just how much pressure these assets have faced. In the first half of 2023, 44 percent carried double-digit cap rates. That percentage rose to 62 percent in the second half of 2023, climbed to 70 percent in the first half of 2024, and peaked at 74 percent in the second half of 2024. By the first half of 2025, the share slipped back to 71 percent.
The backdrop for these shifts, CBRE noted, has been the Federal Reserve’s fight against inflation. Initially described by the central bank as “transitory,” inflation ultimately proved persistent enough to require repeated rate hikes, beginning in March 2022 and continuing through July 2023. By mid-2023, investors were already alarmed that higher rates were stretching much longer than expected. In 2024, however, inflation began to slow, and by the end of that year, many in the market viewed cap rate increases as reaching their peak.
That outlook carried into 2025. In CBRE’s most recent cap rate survey covering the first half of the year, the firm found that while 71 percent of B and C office assets were still priced at double-digit cap rates, the slight decline from late 2024 “may signal the start of a recovery phase.” About 68 percent of survey respondents anticipated no further change in cap rates for central business district offices in the near term, while another 16 percent expected cap rates to decline.
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