Commercial Real Estate Trends: Office Vacancy Rates and Interest Rate Impact

Real Estate Market Reset

• 💡 The commercial real estate market has undergone a re-grounding of values due to a significant interest rate hike, with 2025 signaling a new cycle.
• 📉 Prices have adjusted, making commercial real estate a more compelling investment than a year ago, especially with a more dovish Federal Reserve.
• 🏗️ A substantial pullback in new construction, particularly for multifamily housing, is expected to provide the market time to recover.

Office Vacancy Rate Recovery

• 🏢 Despite earlier concerns, people are returning to the office, leading to a decrease in overall office vacancy rates nationwide to around 17-17.5%, down from over 20% a few years ago.
• 📈 New York City is seeing accelerating vacancy rate drops, with a full percentage point decrease over the last year and record absorption in Q3 and Q4 of last year.
• 📊 Daily office worker attendance has reached 80% of pre-pandemic levels, up from 70% last year.

Bifurcation in Office Properties

• 🏢 A significant bifurcation exists between older, obsolete buildings and newer, class-A properties.
• ⚠️ Vacancies in older buildings are as high as 25-35%, while newer buildings have vacancies around 11-12%.
• 🗣️ The market's reaction to office defaults and potential commercial real estate collapse was overly exaggerated, and the industry is working through these issues.

Financing and Investment Outlook

• 🏦 Banks and credit unions, especially regional and local ones, are crucial for private investors in the sub-$10-50 million price point.
• 📈 After a period of tight underwriting and reduced lending in 2023 and early 2024, banks are now more active in the commercial real estate lending market.
• 💰 The recovery in loan payoffs is opening up balance sheet capacity for new loans, contributing to a bullish outlook for more transactions and refinancing in 2026.