Since the end of the pandemic, the office real estate sector has been focused on attracting tenants back to the workplace in an effort to reestablish it as an essential element of corporate culture. For the most part, newer, highly-amenitized properties in convenient and attractive locations—the types of properties REITs typically own— have fared better in achieving that goal.
While return to office mandates have proliferated in recent months, hybrid working models, and to a lesser extent remote work, remain a fixture. REIT.com asked three office sector analysts, Dylan Burzinski at Green Street, Blaine Heck at Wells Fargo, and Ronald Kamdem at Morgan Stanley, to share their thoughts on how these trends, and other factors, are likely to manifest in 2025.
Will return to office mandates accelerate in 2025 and what is their impact likely to be?
Dylan Burzinski: We’ve seen an incremental improvement in office utilization since 2023, and as we look to 2025, we’re expecting to see a continuation of this trend. Larger companies are calling more employees back to the office, and more importantly, many are being more forceful with those requirements.
In prior years, companies didn’t implement enforcement mechanisms to make sure employees showed up in person. While I expect return to office policies to gain momentum, the ultimate impact on net absorption over the near term is less clear as tenants are still downsizing. However, higher utilization is a good thing overall for office demand.
Blaine Heck: We’ve seen increasingly rigid return to office requirements being implemented by early adopters in the financial, professional, and business services sectors. However, I believe what’s going to be more impactful in the near term is the implementation of return to office requirements from those companies that have been more flexible in their implementation, mainly in the technology sector.
It’s clear that the return to office in New York CIty has impacted the pace of leasing in that market, but it remains to be seen whether traction will be seen in tech-heavy markets on the West Coast, where some tenants may have been overly ambitious on their downsizing efforts. We’re optimistic that this can be a tailwind for the West Coast markets as we progress through 2025.
Ronald Kamdem: Return to office mandates are likely to accelerate in the West Coast where physical utilization of buildings has lagged both Manhattan and the Sun Belt markets. Large tech companies such as Amazon and SalesForce have set the tone and we would expect other companies to move in a similar direction. However, it may take some time and some changes on the ground for leasing activity to follow suit.
While the return to office mandates are an encouraging sign, they will impact each region differently. We see Manhattan as the biggest beneficiary followed by the Sun Belt. On the West Coast, while there is potentially more activity to be gained from lower levels, a potential pickup in leasing may not be enough to offset space lost from downsizing in the next 12-18 months.
What other factors do you see impacting office fundamentals this year?
Kamdem: Solid S&P earnings growth over the next two years is a tailwind for corporations and their potential space usage. We also monitor the impact that the Department of Government Efficiency (DOGE) could have on the utilization of government tenants. Continued investment in AI could drive more tech employees and demand for space.
Heck: We continue to believe that the highest quality buildings in each market will garner an outsized share of leasing activity as employers strive to offer the best experience for their employees to entice them back to the office in a more hybrid work environment.
We’ve also heard of more interest from institutional owners in the transaction market, which has been dominated by private, high worth individuals and groups for the past several years. We see this as a solid endorsement for high quality office properties in the strongest markets and submarkets, despite the major reset in the sector we’ve seen.
Burzinski: Leasing volumes are improving because companies are no longer “kicking the can down the road.” Corporations are now deciding to renew or extend leases, with certain financial services tenants looking for more space. With less economic uncertainty and a better understanding of utilization patterns, more companies will be more comfortable making decisions about their workspaces. Sublease availability rates are also coming down across most markets, which is generally the first sign of stabilization.
Are certain geographic markets showing particular resilience or recovery?
Burzinski: The most resilient markets over the past year were New York City, South Florida, Charlotte, and Nashville. They are all punching above the office average. The Sun Belt markets are still benefiting from in-migration and high office utilization. New York CIty is benefiting from its diversified economy and as the mecca of the financial services industry, which has been a leader in mandating return to office and ultimately driven strong leasing activity.
Kamdem: Manhattan Class A vacancy continues to lead the U.S. commercial office space. There have been some green shoots in Sun Belt markets, with vacancies falling in four out of six markets (Atlanta, Dallas, Charlotte, Tampa) as demand is broadly seeing a pickup. However, this is offset by still elevated deliveries (particularly in Dallas and Raleigh) and as a result, vacancy rates for aggregate Sun Belt Class A properties still remain elevated versus pre-COVID levels. And with 2.5% of existing Class A stock under construction, upward pressure on vacancy rates will likely persist in the near-term.
Heck: New York City continues to lead the charge from a leasing and investment perspective. That said, we see opportunities throughout the country. Sun Belt markets have remained resilient, and we believe high quality, well-capitalized landlords will continue to gain market share given their ability and willingness to fund building upgrades and leasing concessions. The West Coast markets have been slowest to recover given their exposure to tech and media tenancy, but we’re seeing positive signs in those markets as well.
What office design specifications do you expect to be most in demand in the next few years?
Kamdem: Amenity space, meeting and board rooms, remains of key importance to office using tenants. We think the trend of hoteling desk (where employees reserve desks in advance) is likely to be not as prevalent as previously anticipated at the start of the pandemic.
Heck: I believe one of the largest variables for any office building is proximity to transit and other amenities, especially in gateway markets like New York CIty. From a design perspective, conference and complimentary, on-site amenity space has been a large advantage for those landlords that have taken the time and money to build it.
Burzinski: From an amenity perspective, location is the most important factor. In New York City, top lessors want to be near Grand Central or Penn Station. In markets with less access to major mass transit, companies want ingress and egress from major highways. Company leaders are looking to be in neighborhoods with prime experiences close by, including access to food and beverage options and entertainment venues. People want to enjoy the area after work.
From a physical characteristics point of view, not much has changed since pre-COVID. The top amenities in demand are floor-to-ceiling windows and natural light. The biggest tenants are asking for open floor plans with lots of collaborative space in high quality buildings to help build a strong culture. Basic building amenities, like a gym, are considered table stakes at this point.
How significant is the repurposing of existing office space likely to be for the sector?
Heck: We’ve seen a steady reduction in inventory of office space from conversions to other uses, most often to residential, as well as from the demolition of functionally obsolete space. Although the reduction as a percentage of inventory continues to be relatively low, this trend, combined with the lack of new supply, could factor into an overall improvement in fundamentals as demand recovers.
Kamdem: Repurposing is an incremental positive as it takes office supply off the market, but we note it may not be a large-scale solution.
Based on select recently announced office-to-multifamily conversions, costs to acquire an existing office building are $240-$340 per square foot (psf) and costs to convert to multifamily are $360-$510 psf, culminating in a total cost of $600-$770 psf. Nationally, unless office prices further decline, or apartment rents significantly grow, the economics of conversion don’t pencil and success stories on conversion may be the exception not the rule.
Data from CBRE suggests that 133 office-to-multifamily conversion completions have created approximately 22,000 housing units since 2016. CBRE estimates that 169 such projects classified as currently planned or underway will produce an additional 31,000 units. For context 31,000 units represent less than 1% of total multifamily stock.
Burzinski: Repurposing is an issue that grabs headlines because the world of office real estate has been so challenged over the last five years. People talk about the potential of buildings to be converted because it could help solve the housing crisis many cities are facing. Realistically, a significant number of offices are not going to be converted.
Many office buildings can’t easily be converted due to elevator banks and floor plate sizes. Additionally, many municipalities are still trying to figure out zoning. Even if a space can be converted from a physical and zoning perspective, it needs to make sense from an economic lens. Unless there are significant incentives from the municipalities, repurposing a large swath of existing office product is not likely to be a hugely profitable endeavor.
Where do you see the best opportunities for office REITs coming from in 2025?
Kamdem: Midtown Manhattan submarkets have shown consistent improvement in demand and drop in vacancy. We continue to view this part of New York as the strongest office market in the country and REITs that have exposure should benefit. There may also be opportunities to go on offense at this point of the cycle and buy high quality assets at distressed prices.
Burzinski: The one bright spot for office REITs is that they have the potential to be acquisitive. Office REITs’ lower cost of capital can help them buy higher quality assets in the private market. They have a cost and access to debt advantage over many hamstrung private market owners. Should share prices continue to trade at or above NAV, it would make sense for office REITs to continue buying assets.
Heck: We see office REITs as being in an advantageous position to gain market share from private landlords with an inability or unwillingness to spend on their properties and fund leasing concessions. We also see this as a generational opportunity for REITs to go on the offensive while other institutional investors remain largely sidelined and acquire solid properties at high discounts to replacement cost.
Are there other trends or developments in the office sector that you’re watching?
Burzinski: The biggest development we’re watching is what will happen with debt capital markets. Private debt markets are thawing, particularly on the CMBS side. It’s largely been concentrated in New York CIty so far, though. Transaction volumes will likely be lower than they have been historically until debt capital markets stabilize.
Heck: Recent meetings and calls we’ve hosted with the brokerage community point to increased availability of debt financing for well-positioned, high quality office assets which, when combined with less willingness from some lenders to ‘kick-the-can’ on maturities, should result in more pricing transparency in the sector. In 2024, we also saw a notable decrease in sublease space driven by leasing and conversion to direct availability, which we see continuing into 2025.
Kamdem: Office density is a key debate among investors and our proprietary return to office survey last year suggests there could be another approximately 5% reduction. Smaller tenants (less than $1.0 billion of revenue) may have a disproportionate share of the space reduction versus larger tenants.
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