Worries about tariffs have settled heavily on companies, resetting executive expectations and causing some to rethink their office leasing plans. In recent years, there has been a visible improvement in a sector trying to pull itself out of a pit — but all of a sudden, it is facing the question, “What now?”
The opening of 2025 looked sunny for U.S. business, as conviction was at the highest level in three years, according to the Conference Board’s Measure of CEO Confidence. Chief Executive’s CEO Confidence Index in January was 6.31 out of 10 for current conditions at the time and 6.93 for future conditions.
Companies were leasing office space at a refreshing rate, with availability ending 2024 at 24.8%, the first major decrease since the pandemic, according to Savills Research & Data Services’ Q4 State of the US Office Market. A return-to-office push drove strong leasing activity. Sector volume reached a post-pandemic high during the fourth quarter at 56.7 million square feet, and this momentum is expected to continue in 2025 as return-to-office continues to gain traction despite economic uncertainty.
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However, things have changed with the tariff impositions. In March, CBRE warned of tariff impacts on CRE. The firm didn’t expect the office recovery to stall unless there was an economic downturn.
“Uncertainty is the kryptonite of the commercial real-estate market,” Lonnie Hendry, chief product officer of real-estate data service Trepp, told The Wall Street Journal.
However, JPMorgan Chase now says the odds of a recession are up to 50-50. When conditions are bad, companies tend to reduce headcount, which decreases the need for office space.
“No one wants to be the last one to make a long lease, buy a building or invest capital before things fall apart,” Mark Weiss, executive vice chairman of Cushman & Wakefield, told the Journal.
Then there is the problem of what properties companies want. GlobeSt.com has reported on the flight to quality in all property types. This holds strongly for office, where 10% to 15% of buildings are the desirable A and A+ classes. B and C, however, are the bulk of the market. Even if companies could be guaranteed to keep moving ahead with space demands, most buildings would need work to attract them.
“You can’t justify big capital investment, which is what those buildings need,” David Steinbach, global chief investment officer of Houston-based Hines, a commercial real-estate owner and developer, told the Journal. Hines was in early discussions about new projects, which have been shelved for now.
The new investment bank Donahue Douglas — founded by Washington, D.C.-based developer Don Peebles and former Carlyle Group partner Doug McNeely about a year ago, is two-thirds through raising $1.5 billion to convert offices to housing, the firm claims.
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