Working late, office buildings, Financial District, London.
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A version of this article first appeared in the CNBC Property Play newsletter with Diana Olick. Property Play covers new and evolving opportunities for the real estate investor, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large public companies. Sign up to receive future editions, straight to your inbox.
The recovery in the U.S. office market has been gaining steam this year and may be set to accelerate. While vacancy rates and return-to-office employee volume have been focal points in gauging demand, a new look at interest in office from the capital markets points to an even stronger recovery than previously thought.
JLL, a global commercial real estate and investment management company, gave Property Play exclusive access to a limited distribution client report. It found that office transaction momentum strengthened significantly in the first half of this year, with total industry volume up 42% year over year to $25.9 billion.
Looking at JLL’s office sales transactions alone, volume was up 110% from the first half of 2024 to the first half of 2025, more than double the momentum of any other major property type, including data centers.
The report notes that as we move through the third quarter, JLL is actively seeing the transition from “office curious” to “office serious” take hold across the industry. Lower interest rates are propelling much of that.
In addition, the number of bids on a given transaction was up 50% over the same period, with the second quarter alone experiencing $16 billion in office bid volume, which is the highest quarterly total since the second quarter of 2022 when the 10-year treasury yield was below 3%. Bid volume can measure growth and health of a sector from a capital markets perspective.
“What typically happens is, after a downturn, the high-net-worth private capital comes back in because of opportunistic returns, and they start buying. The REITs follow, and then the institutional capital flows, like pension funds, separate accounts, offshore capital, follow the REITs. That’s exactly what’s playing out right now,” said Mike McDonald, senior managing director and office group leader at JLL.
Larger deal demand, that of $100 million or more, is increasing, up roughly 130% in the first half of this year compared with the same period in 2024. This is due to increasing institutional investor appetite for higher quality office, as well as better debt availability, according to the report.
There is, of course, a flight to quality, with top-tier office buildings seeing the bulk of the demand. As those buildings fill up, second-tier buildings will start to see increased demand and could actually outpace the top tier buildings as it relates to rental rates and absorption over the next five years, according to McDonald.
The massive office downturn in the first years of the pandemic caused a pullback in planning for new buildings, so there is now very little new office space under construction. The market will see just 6 million square feet of office space delivered next year, which is 90% below the four year annual average following the great financial crisis.
“Some people may refer to it as slowing down; it’s really hitting a brick wall,” said McDonald. “There’s going to be a dearth of new deliveries the next three years, as evidenced by the 6 million square feet next year, which is anemic based on 30-year historical averages.”
He also pointed to overall reduction of office inventory, as older office buildings are either torn down or converted to residential, hospitality, self storage, or just reimagined into something other than office.
The lowest quality, distressed segment is still seeing some bargain hunters, so there is something of a bar-bell effect.
“We call them dark matter, and they do matter. It’s that 1-million-square-foot tower in downtown Detroit or Pittsburgh or Cleveland or Dallas that is 40% occupied,” said McDonald. “Capital looking for highly distressed, very opportunistic returns, very low basis, where an asset may have traded five years ago at $300 a foot, and they can buy it now for $50 a foot. At that lower investment, they can reduce rents and have more velocity because their basis is lower, they have more of a competitive advantage.”
Demand tailwinds for office overall continue, as company downsizing rates are stabilizing. Companies are also no longer shedding very much space when they relocate; in 2022, on average, companies were getting rid of almost 20% of their space when they made a move. That is now down to 3%, according to JLL, a clear sign of stabilization.
This year REIT acquisitions have been strong. The stocks of office REITs like BXP, Vornado and SL Green are higher in the last six months, although the largest, Alexandria Real Estate Equities, is still struggling.
Lower interest rates over the next several quarters will certainly help in the cost of debt for dealmaking, but the reason rates are coming down is because of weakness in the economy. That creates a new pressure on the office market when it comes to demand from employers.
“We’re very mindful of the impact, what that’s going to have on the actual tenant and the companies that actually occupy these buildings,” said McDonald. “You have to think about the macroeconomy, geopolitical risks, all the things that go into setting our overall capital market environment, and price of debt is just one component of it.”
McDonald said next year may be more about institutional capital taking the lead. These so-called green shoots in the office market will likely propel both leasing metrics and valuations higher over the next several years.
