• Investment-grade office values up 1.8% QoQ, +0.2% YoY (CoStar Q3 2025)
• Prime office segment notched +3.3% YoY; broader market still –43.9% from 2021 peak
• CMBS office delinquency rate hit 11.76% (Oct 2025), surpassing GFC levels (Trepp)
• National vacancy over 19%; leasing demand remains sluggish (Moody’s, CoStar)
• Cap rates for top offices stabilize at 7–8%; lesser assets see little buyer interest

U.S. office real estate is showing early signs of stabilization at the top, but distress is deepening across the rest of the sector. After nearly three years of relentless value erosion, Q3 2025 data reveals a flicker of life for prime office assets, with pricing indices registering their first annual gain since 2022. Yet, this emerging floor is narrow—while trophy offices are drawing cautious capital and renewed leasing, the majority of the market is mired in record delinquencies and persistent vacancy. For capital allocators, this bifurcation is now the defining reality: discipline, not optimism, drives capital flows and underwriting.

CoStar’s Q3 2025 index reports investment-grade office values rose 1.8% quarter-over-quarter and nudged up 0.2% year-over-year—marking the sector’s first positive annual print in three years. Prime office in major metros outperformed, gaining 3.3% YoY, signaling that core assets with high occupancy and amenities are attracting tenant and investor interest. By contrast, the equal-weighted index—reflecting smaller and secondary offices—fell 2% YoY, confirming that most of the market remains under pressure. “It’s a tale of two markets: trophy towers see activity, but older buildings are facing obsolescence,” a New York broker observed last week. The implication is clear: only best-in-class assets are seeing floors form.

Loan distress is accelerating. Trepp data shows CMBS office delinquencies reached a record 11.76% in October, up 63 bps month-over-month, eclipsing even Great Financial Crisis levels. Landlords are increasingly defaulting or restructuring as cash flows falter and refinancing options shrink. Regional banks have slashed office lending, raised reserves, and demanded stricter covenants, while new CMBS issuance avoids office-heavy deals. At the same time, opportunistic capital is targeting distressed debt and assets at steep discounts, sometimes clearing the lowest rung of market pricing. Still, for commodity or fringe-location offices, liquidity is evaporating—values remain indeterminate, and forced sales often yield little recovery. The sector’s pain is far from over.

National office vacancy surpassed 19% in recent Moody’s and CoStar tallies. Leasing demand is tepid, with return-to-office trends failing to fill empty space in most submarkets. The modest pricing recovery is concentrated in buildings with strong locations, modern systems, and top amenities—those capturing “flight-to-quality” tenant movement. Meanwhile, Class B and C properties, especially in oversupplied cities, continue to bleed occupancy. The day-to-day market feels subdued: “Crane lines at dawn now highlight empty floors, not new growth.” Absent a catalyst, fundamentals are a persistent drag.

Capital markets are drawing a sharp line: lenders and investors apply conservative standards, requiring low leverage (sub-50% LTV), interest reserves, and strong sponsor backing for any office exposure. Underwriting for prime assets may now moderate cap rate expansion and cautiously pencil in rent growth if submarket vacancy improves. For weaker offices, assumptions remain defensive—higher cap rates, lower rents, and extended downtimes prevail. Debt buyers are emerging, but only at deep discounts. Owners of stabilized assets are quietly testing the market, while those with challenged properties seek workouts or explore conversions. Defensive postures define today’s office capital stack.

The coming quarters will test whether Q3’s stabilization can broaden. Year-end leasing could offer clues; a surge in blue-chip commitments would be a positive signal. The sector faces a wave of loan maturities in 2026–2027, with refinancing hurdles likely to drive more distressed sales or workouts. Policy interventions—such as incentives for conversions—are being explored but have yet to meaningfully alter the landscape. If capital costs remain high and tenant demand stagnant, further bifurcation is probable. The sector’s reset is not finished.