The U.S. office sector has been the hardest hit during the recent corrective period for commercial real estate. 10-year Treasury yields that are about 170bps higher than where they were in the post-GFC period have created headwinds for real estate assets in general. Office assets, meanwhile, have also underperformed due to a lack of physical demand related to the aftereffects of the pandemic. While it appears we’re at the beginning of a recovery for office valuations, as the sector’s operating fundamentals show promise, it still faces significant challenges before it can return to prominence in institutional portfolios.
Dislocations created by the pandemic
Historically, the office sector was linked to broader economic growth,
with demand closely aligned with hiring within the professional services
sector. The pandemic upended this relationship as the rise of working
arrangements, including work-from-home and hybrid agreements, have
created a dislocation between traditional demand drivers and net office
demand. This has been evident as the historical correlation between
office employment and net leasing activity, also known as the absorption
rate, dropped significantly between the period before and after the
pandemic...
RSK: Hard to say. I do think we have hit bottom or close to it but that may be the new norm. In case you wonder what the word bifurcated means: divide into two branches or forks.
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- - Volume: 25 - WEEK: 18 Date: 4/29/2025 3:01:28 PM -