Is 2025 the Beginning of the Office Turnaround?

People in CRE — and in businesses and governments and neighborhoods as well — have wondered when enough would be enough for the disaster of the overall office market.

CBRE said that the office sector may be beginning to stabilize, although the start — reaching true bottom— won’t happen until 2025. The company pointed to Q2 positive net absorption, which hit 2.5 million square feet, for the first time in two years. It added that the trailing four-quarter trend was also “moving in the right direction.”

Then why talk about 2025? Because more has to happen, including pain. Investors aren’t going to change their strategies or decisions and invest more money based on a single quarter of data. Another 33.5 million square feet of inventory is expected to be completed through 2026.

That doesn’t count the existing buildings that lack sufficient tenants, but the ones facing the greatest voids and lack of compensating prospects are older buildings that have fallen into obsolescence. And office recovery is more than the fate of some buildings. The category has to stand on its own.

The stark differences in some cities can be disturbing. A Bloomberg report compared CRE turmoil in aging central business districts to the state of outer neighborhoods. Century City of Los Angeles is wealthy, bustling, and the site of construction. But in the area’s core downtown, tenants are bailing out of buildings and landlords are going bust. A Brookfield Corp. affiliate defaulted on $2.2 billion of mortgages since 2023. There are tent camps. An abandoned project called Oceanwide Plaza is headed for a bankruptcy auction.

The challenge is not just office space but the greater environment. “We use the term ‘flight to quality’ often,” Kevin Bender, executive managing director at Jones Lang LaSalle in LA, told Bloomberg. “It’s a movement not only to trophy assets but also to more of a trophy environment.”

CBRE forecasts that office vacancies will top out at 20% next year as cap rates for the asset class see a peak. But that is a general, average observation. About 80% of organizations have a return-to-office policy but only 17% enforce it, according to a CBRE study. About 60% of employers want employees in the office at least three days a week but only 51% of employees meet the demand. Additionally, 64% of respondents said that their office utilization patterns have reached a steady state. That seems like a good news/bad news scenario. It could create an upper level of predictability and stability. That is good. But it might come at the price of a lower level of collapse which is far from a steady state.