More Signs Point to an Office Turn Around

04/02/2025

• Lease on Life: Signs of an office real estate rebound emerge as lending surges, leasing activity grows, and investor confidence returns.

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More Signs Point to an Office Turnaround

Survive to ‘25. That has been the prevailing sentiment in real estate for the past few years, especially in the struggling office sector. Reduced demand due to the persistence of hybrid and remote work, combined with rapidly rising interest rates, has put fear into nearly every office portfolio manager. By late 2024, conditions remained bleak—interest rates showed no signs of dropping, and nearly a trillion dollars in commercial mortgage debt was set to come due in 2025. Many had begun shifting their mindset from "Survive to ‘25" to "Survive through ‘25." But now, just a few weeks into the year, there are signs that office real estate may finally be poised for a turnaround.

The first positive sign comes on the lending front. The Mortgage Bankers Association released a report showing that lending for office had increased by 105 percent, leading all property categories. Lending is up across the board with commercial mortgage-backed securities having the most dramatic increase, with loan originations soaring 128 percent year-over-year. Even government-sponsored enterprises like Fannie Mae and Freddie Mac expanded their lending by 72 percent. The MBA chief economist Mike Fratantoni explained, “The significant, but brief, dip in interest rates in September, followed by a pickup in market sentiment post-election, resulted in more business, with origination activity back to 2022 levels.”

Other positive signs are emerging from the growth of several REITs. The office-focused REIT Kilroy held its earnings call today and reported positive absorption. The company added 708,000 square feet of leases, marking its highest quarterly leasing volume since the fourth quarter of 2019. Kilroy’s new CEO, Angela Aman, stated, “Leasing activity meaningfully accelerated to more than 700,000 square feet in the fourth quarter, underscoring the recovery that we are seeing play out across our West Coast markets.”

The global investment firm KKR also recently held its earnings call, reporting significant growth in its real estate investments. The company’s co-CEO, Scott Nuttall, an avid runner, captured the momentum best with this analogy: “The sun is out and we're running on flat road. The conditions and forecasts are good. We're comfortable in our new gear. We're stronger for the last two years of hard work and we're picking up speed.”

The office real estate sector has endured a rough few years, and plenty of questions remain about the future of the office market and the impact of borrowing costs. But, sentiment is noticeably more positive now than it was just a few months ago. The clouds may still linger over the industry, but for now, a bit of sunlight is breaking through, promising an end to the storm that has been raging for the past two plus years.

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Propmodo Daily is written and edited by Franco Faraudo with contributions from readers like you and the Propmodo team.

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