The future of U.S. office valuations: analyzing changing market dynamics and investor sentiment

It is no secret that valuations of office buildings continue to be in a corrective state, with many wondering where they will shake out when all is said and done. It is a fair question given the culmination of structural shifts as it relates to office utilization, and cyclical macroeconomic headwinds such as high inflation and the corresponding elevated interest rate environment.
Although office leasing and valuations are correlated, the recent drop in values is seemingly more attributable to the elevated cost of capital, rather than demand fundamentals. In 2020, leasing was severely challenged in the wake of the COVID-19 pandemic, but offices—both suburban and CBD—held their values and even appreciated in value over time until 2022. However, when the Fed began hiking rates, values began to plummet.
As the Fed mulls potential rate cuts in the back half of 2024, it will be interesting to monitor how valuations react. There is plenty of capital on the sidelines that has been earmarked for real estate investment, and with a rate cut, conventional wisdom would suggest there will be a flurry of investment activity. As the future of office utilization becomes clearer, this investment momentum is anticipated to gain further traction as investors capitalize on emerging opportunities.

August 9, 2024