• Office sales with loan distress up 47% YoY; $7.2B in Q1 2024.

• National vacancy rates rise to 19.5%, surpassing 25-year highs.

• Average cap rates widen 70bps YoY to 7.3% for major metros.

• Lender workouts triple since Q2 2023; 35% involve asset impairment.

• Leasing volumes down 12% sequentially; mainly trophy assets see resilience.

A rapid repricing is underway in U.S. office real estate, as persistent loan distress and vacancy surges drive a fundamental reset in values and capital flows. With sales of troubled assets climbing and cap rates at multidecade highs, investors, lenders, and tenants are all recalibrating risk, opportunity, and capital allocation across major markets. This emerging landscape foreshadows more nuanced credit behavior—and potentially divergent sector outcomes—over the coming quarters.

As capital markets digest $7.2B in office sales tied to loan distress in Q1 2024—a 47% YoY rise—the market is signaling deep-seated stress. Notably, lender-driven dispositions accounted for 26% of all office trades in the quarter, compared with just 9% pre-pandemic. As a result, larger spreads between bid and ask are evident, with one national broker stating, “Sellers have ceded on price by necessity, not conviction.” Price discovery, for now, is stretching deal timelines.

Meanwhile, national office vacancy now stands at 19.5% according to Costar, marking a 120 bps sequential increase and the highest level since 1999. Class A trophy product, however, has seen selective resilience, with renewal rates still above 85% in gateway CBDs; contrast this with B/C assets, where some submarkets report effective occupancy below 60%. On balance, the bifurcation in lease-up favors newer or repositioned stock, pushing owners of legacy assets toward more aggressive concessions or capital investments.

By contrast, even after the Fed’s hold on benchmark rates, average cap rates for core office assets reached 7.3% in Q1—up 70bps YoY and 160bps over three years. Debt service coverage ratios have compressed, triggering lender concern: restructuring and workout activity is up 200% vs. Q2 2023 and 35% of those involve asset impairment or discounted paydowns. Ultimately, banks have moved to tighten covenant packages for new loans, while nonbank lenders cautiously re-enter at higher spreads. Funding costs are not abating.

Still, the deal pipeline has evolved. Private equity and opportunistic funds, flush with “dry powder,” have targeted $4.8B in office asset purchases YTD, but nearly 70% of closed trades are below prior underwritten values. As investors quietly reposition capital—opting for select, well-located assets with long-duration leases—a growing proportion of legacy loan maturities face forced resolution or transfer into special servicing. Certainty of execution, not price, is the new differentiator.

Should policy rates begin to ease in late 2024, refinancing windows could modestly reopen; yet persistent oversupply (51M sf net new over 18 months) means absorption and rent growth will lag historical norms. If lender resolve hardens, more discounted trades may reset price indices through 2025—strengthening the case for fresh equity and high-IRR repositioning strategies. On balance, capital seeking stable yield is likely to divert to sectors with clearer demand fundamentals until operational performance and value stability return to office.