Has the office market begun its recovery yet? There’s growing evidence that it has — at least the upper tier. In its latest earnings call, CBRE Group noted 28% U.S. office leasing revenue growth, with occupiers “increasingly comfortable making long-term decisions.” A CBRE report showed top-tier office owners cutting back on tenant concessions.
One of the latest signs is Blackstone’s continuing move into new office real estate debt investments as it readies a stake in a 50-story property in Midtown Manhattan as Bloomberg reported. However, a wider look at the office market shows that improvement isn’t universal and doesn’t eliminate all past problems. This became clear last month in the Q4 2024 earnings call for the company’s $17 billion CRE debt on REIT, Blackstone Mortgage Trust.
BXMT has seen “a lot of repayments,” Katharine Keenan, president, chief executive officer, and director of BXMT said during the call.
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“The good news was that asset spreads have come in, but importantly, so have the spreads on the liability side,” said Austin Pena; executive vice president of investments at BMXT. He noted that leverage spreads were consistent with historical ranges of 900 to 1,000 basis points and that the company is seeing “compelling” risk-adjusted returns” on investments in their pipeline. “Today, we're making loans at reset basis that reflect today's valuation environments. So, we really feel very good about the risk-adjusted returns we are able to create right now.”
Keenan mentioned the recent CMBS refinancing deal of the Spiral, a prominent office tower in New York City. The proceeds paid back the balance of the $1.8 billion construction loan BXMT made in 2018.
“I think it really comes down to the opportunities that we see,” Keenan said. “I mean, if we could do more deals like the Spiral, we absolutely would. I think that though, as Austin mentioned, the aperture of the type of office opportunities and where we see our performance is quite narrow and we're going to be extremely selective.” She expected that office allocation in their portfolio would shrink over time because “we're going to be very selective on the new stuff.”
Keenan’s observation parallels other CRE analyses and market activity. McKinsey predicted in February 2025 that by 2030, the sector could face a staggering $800 billion loss in real terms under a moderate scenario, translating to an average office value drop of 26% in just five years. This dramatic decline is primarily driven by a persistent fall in demand for office space, a trend that has been unfolding since 2019.
The market trends between 2019 and 2022 tell a compelling story of this shift. Total dollar transactional volume of office space plummeted by 57%, while the average sale price per square foot saw a 20% decrease. Additionally, asking rents in real dollars experienced a significant 22% drop. These figures underscore the profound changes taking place in the commercial real estate sector.
Yardi found office sale prices fell year-over-year by 11.2% by the end of 2024, from $196 per square foot in 2023 to $174. Discounted office sales increased, selling for a lower price than the building’s previous transaction. “Nearly 600 buildings, more than a third of all office properties with a known sale value in 2024, traded at a lower price than the building’s previous transaction.”
And then there are the likely massive federal office space cuts that could jeopardize an estimated $15.6 billion in CRE loans. While some parts of office are doing well, moving forward depends on where investors go fishing.
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