Five years after the start of the COVID-19 pandemic, the commercial real estate market is forever changed. Office space has been a drag on investors’ portfolios for the past several years; the move toward remote work has been devastating to the prices of office buildings.
But many institutional investors think the downturn is nearing an end, and they see buying opportunities as the market bottoms. Leasing is up, and demand for office space appears to be coming back. For institutional asset allocators, the best time to buy commercial real estate could be right around the corner.
The End of WFH?
The era of working from home appears to be coming to a close, with more and more companies, especially New York-based financial institutions, mandating a return to the office five days per week. JPMorganChase and Goldman Sachs are among these large employers calling for a return to the office.
“You’ve … seen some return-to-work announcements from some really big employers,” says Greg Kuhl, a portfolio manager on the global property equities team at Janus Henderson, who also points to large tech firms, like Amazon, mandating that employees be in the office five days per week.
KPMG’s 2024 CEO outlook found 83% of CEOs surveyed said they expected a full return to the office within the next three years.
Chad Tredway, head of real estate in the Americas at J.P. Morgan Asset Management, says the stars are aligning for office space demand.
“With strong economic growth, more workers returning to the office, and fundamentals improving, especially for top-quality assets, the sector appears to be very well positioned to see gains in the coming quarters,” Tredway says.
State of the Market
Yet the number of new office construction starts continues to plummet, which could significantly affect supply-and-demand dynamics. According to the CBRE Group’s 2025 outlook, new supply is expected to fall to 15 million square feet this year, well below the 10-year average of 44 million.
“The development pipeline is at the lowest level since the global financial crisis, representing less than 1% of stock across the country, while conversions of former office buildings are accelerating,” Tredway says. “Combined, these improvements are making for the most favorable supply-demand dynamic the industry has seen since the beginning of the pandemic.”
Glenn Brill, managing director in FTI Consulting’s real estate solutions practice, says the trends appear favorable for office space investments.
“Given the considerable amount of distress in the office market, it appears a consensus may have formed that the office market has bottomed out,” Brill says. “Buyers are seeing pricing below replacement cost and opportunities for redevelopment, with the hope for future office space demand as large employers continue to commit to ‘in-the-office’ culture and seek a quality work experience for their employees.”
Janus Henderson’s Kuhl says fundamentals are pointing to a market bottom. Net office absorption—how much space is leased net of how much is delivered—recently turned positive for the first time in years, Kuhl says.
“From a new-supply perspective, that was positive in the fourth quarter [of 2024] for the second time post pandemic, and it [had been] been negative for seven or eight quarters in a row,” Kuhl says.
Deloitte, in its 2025 commercial real estate outlook noted that a rebound for commercial real estate depends on the future of global interest rates.
“For some in the commercial real estate industry, the shift to prospective rate cuts has boosted sentiment for the remainder of 2024 and 2025,” the report stated. “That said, a single rate cut alone is not expected to immediately alleviate lingering concerns around refinancing risk for maturing loans or make capital and debt for acquisitions suddenly cheaper or easier to attain.”
Best Buying Opportunities
Kuhl says New York has been the best market for offices from a fundamental perspective; the city does not have enough Class A—the most expensive—office space, to meet demand. He also pointed to markets like Boston and some Sun Belt states as improving. West Coast markets, including in California and Seattle, are not seeing signs of improvement, but they also are not getting worse, he adds, backed up by J.P. Morgan’s Tredway.
“The tip of the spear for the recovery continues to be top-quality buildings,” Tredway says. “In Manhattan, premier assets are essentially back to pre-pandemic utilization rates, while Class A properties are at 85% and rising. Clearly, there are challenged pockets of the market, but with 60% of the market’s vacancy concentrated in the bottom 10% of buildings, it is a smaller subset than many think.”
Leasing activity is also picking up. In the third quarter of 2024, office leasing in Manhattan grew by 5.6%; while modest, it was the market’s strongest quarterly volume in two years. In the first three quarters of 2024, leases were signed covering 23.14 million square feet. While still below 2019’s leasing volume of 42.97 million square feet, the availability rate fell to 17.3%, the lowest in Manhattan in 18 months.
Kuhl also makes the case for investors adding exposure through real estate investment trusts.
“It’s not uncommon to see office buildings that could be valued at a billion dollars or more,” Kuhl says. “For an investor, that could be a lot of risk concentrated in one asset. I think this is where buying the shares of a REIT are attractive from a diversification perspective, because you can get that exposure without deploying so much capital.”
Who’s Buying?
With trends indicating a potential turnaround on the horizon for commercial real estate, some managers are already getting in early.
“Recently, [Norges Bank Investment Management] purchased office assets in Boston, San Francisco and Washington, DC,” Brill says. “No doubt they were attracted by the high quality of the assets in relation to price today and anticipated market conditions into the future,” referring to the fund’s December 2024 purchase of a $976.8 million stake in an office portfolio across those markets. The $1.573 trillion fund has a 1.7% allocation to real estate.
Korea’s National Pension Service recently announced an $800 million venture with Almanac Realty Investors, the private real estate investing arm of Neuberger Berman, to invest in real estate platforms and . The pension fund established a real estate platform investing team in 2024.
“As the real estate investment landscape evolves, platform investing has emerged as a transformative trend reshaping the industry,” said Insub Park, senior portfolio manager of NPS’ real estate platform investment team, in a statement with the Neuberger partnership announcement. “This approach not only optimizes value creation, but also aligns with long-term growth strategies, making it a cornerstone for forward-thinking investors.”
In 2023, sovereign wealth funds increased their investments in real estate by 50% from the year before, according to data from the International Forum of Sovereign Wealth Funds. The increase represents $14.7 billion in investments, a level of commitment not seen since 2018.
Still, some institutional investors are staying on the sidelines for now. The largest public pension funds in Canada are significant investors in real estate, and in the past few years, their losses from the asset class are well publicized. In fiscal 2024, PSP Investments took a 15.9% hit in its real estate portfolio, while CPP Investments sold a 29% stake in a Manhattan office building at 360 Park Avenue to Boston Properties for the token sum of $1.
“With a [negative 15.9%] return, Real Estate was hit particularly hard by the structural changes in the office sector and supply-demand dynamics in certain regions as well as higher rates, which have pushed prices down and cost of financing up,” stated PSP Investments’ 2024 annual report, published last March.
CPP Investments had an 11.3% allocation to real estate in fiscal 2020. By fiscal 2024, it had shrunk to 8%. In its 2024 annual report, the fund attributed low returns—including 0.7% in the real estate portfolio—to the “transition towards e-commerce and the impact of evolving hybrid workplace trends.”
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Tags: CBRE, Chad Tredway, commercial real estate, Deloitte, Glenn Brill, Greg Kuhl, J.P. Morgan Asset Management, Janus Henderson, KPMG, Real Assets, Real Estate