Dr. Gleb Tsipursky – The Office Whisperer
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Angela Howard – Culture Expert
Drew Jones – Design & Innovation
Jonathan Price – CRE & Flex Expert
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The U.S. office sector continued a fragile but notable rebound in the first quarter of 2025, according to Baker Tilly’s Q1 2025 Market Report. After years of turbulence driven by the pandemic, signs suggest the sector may finally be stabilizing, particularly in high-quality Class A and trophy assets across top-tier markets.
Signs of a Bottoming Out
A growing number of analysts believe the office sector may have reached or is nearing its post-pandemic bottom. Values for Class A office properties in key markets appear to have hit their floor after a near 40% drop in value since early 2020.Â
Market momentum is supported by several factors: a modest increase in office attendance, steady leasing activity, constrained new development, and a slight improvement in access to debt financing.
Trophy properties in submarkets like Century City in Los Angeles, Chicago’s West Loop, and Manhattan’s Park Avenue are outperforming. Demand for top-tier space is fueled by companies aiming to attract workers back into the office with high-end amenities and prime locations. This uptick in Class A demand is expected to spill over into the Class B segment in some areas.
NYC Leads the Charge
New York City emerged as a standout performer. With over 12 million square feet leased in Q1 (the strongest showing since late 2019) Manhattan’s office market has exceeded pre-pandemic occupancy levels. Major deals included Jane Street Capital’s nearly 1 million square foot renewal and expansion in the World Trade Center and Horizon Media’s 367,000 square foot lease in Hudson Square.
Headwinds and Distress Remain
Despite early signs of recovery, several threats cloud the outlook. A potential trade war, a slowing economy, and increasing distress in office-backed commercial mortgage-backed securities (CMBS) could dampen momentum. The CMBS office distress rate hit 19.2% in March 2025, indicating growing financial stress in the sector.
Government actions could further complicate the picture. While return-to-office mandates from the federal government may support demand, new efforts to reduce the government’s office footprint could weaken demand in Washington, D.C., and other government-heavy markets.
Diverging Fortunes
The office sector is increasingly split between winners and losers. Trophy and well-located Class A properties are capturing the bulk of tenant demand, while outdated or poorly located Class B/C assets continue to underperform. As more lower-tier assets face obsolescence, the gap in performance across quality levels is widening.
Slower Transactions, But Opportunities Emerging
Transaction activity slowed in Q1 2025 compared to late 2024, but investor interest remains focused on distressed opportunities and deep discounts. Key deals included the $400 million foreclosure sale of One Lincoln in Boston, multiple South Florida asset sales by DWS Group totaling over $400 million, and the $150 million sale of a Manhattan property by Brookfield at a sharp discount from its previous price.
REIT performance in the office space also faltered early in the year, with returns down 4.9% through February, lagging both the broader market and other real estate segments.
Outlook: Cautious Optimism
While risks remain, the fundamentals for a recovery are forming. The combination of discounted asset prices, reduced new supply, and tenants seeking premium office space creates a potentially attractive setup for opportunistic investors. However, macroeconomic and financial headwinds could still derail progress, making this a pivotal year for the office sector.
