US Office Real Estate Market Shows Signs of Stabilizing Amid Discounted Property Sales

Analysts point to increased transactions of distressed office properties, signaling a potential market turnaround.

The struggling US office real estate market may be showing signs of stabilizing, as recent sales of distressed properties at significant discounts suggest a bottoming out, according to analysts. The sector has faced considerable challenges since the pandemic, with rising interest rates and a shift to remote work driving prices down. Office property values dropped 12.4% year-over-year as of the second quarter, based on the RCA Commercial Property Price Index.

Stephen Buschbom, research director at Trepp, believes that the worst of the market's distress may be over. However, he emphasized that more transactions are necessary to fully establish new pricing benchmarks. "We still have price discovery left," Buschbom stated, noting that increased transaction volume would signal greater acceptance of current valuations.

Pre-pandemic, office sales averaged $35 billion per quarter, but this figure has plummeted to $13.4 billion per quarter since 2023, driven by high vacancies and rising operational costs, according to MSCI Real Capital Analytics. Despite the downturn, a recent uptick in sales of stressed office properties has given analysts hope that the market may be approaching a turning point.

Kevin Fagan, head of Commercial Real Estate Economic Analysis at Moody's, pointed out that several high-profile office buildings have recently sold at steep discounts, helping to create a new pricing benchmark. Moody's reported that since the end of the first quarter, seven office properties have sold at discounts exceeding $100 million, compared to just three such sales throughout 2023.