🚨U.S. office vacancies hit a record 20.7% in Q2 2025, the highest in history, driven by remote work, corporate downsizing, and tenant flight to newer assets [Source: Reuters]. Cash flow erosion is colliding with $290 billion in office loan maturities by 2027, leaving many properties unfinanceable at current valuations. Lender pullback is stark—banks’ share of new CRE loans fell to 24% in Q2, and CMBS office delinquency rates jumped to 11.1%. Owners of B/C assets face heavy TI burdens, elongated lease-up times, and rising exit cap rates, intensifying distress and narrowing capital options.
U.S. office vacancy: 20.7% (Q2 2025, record high).
San Francisco vacancy: 27.7% (vs. 8.6% in 2019)].
CMBS office delinquency: 11.1% (June 2025, up from 7.6% YoY).
Office debt maturing: $290 B by 2027 (~33% of total).
Loan Performance. DSCR erosion widespread; many loans <1.0 due to NOI collapse. Refinance only feasible at <60% LTV with 7–8% debt costs. Trophy assets can support higher DSCR buffers; commodity B/C are effectively unbankable.
Demand Dynamics. Leasing demand bifurcated—Class A with amenities and ESG features hold occupancy near 85–90%. Class B/C face 30–40% vacancy underwriting assumptions, elongated 18–24 month lease-up, and free rent/large TI concessions.
Asset Strategies. Non-core offices require repositioning (residential/lab conversions) or discounted sales. For core holds, capital must target spec suites, lobby refreshes, and wellness certifications to pull tenants. Obsolete stock faces permanent vacancy.
Capital Markets. Widened spreads and muted volume ($23B office sales H1 2025 at ~$189/sf) confirm bid-ask gap. CMBS tone punitive; private equity dry powder only chasing prime or conversion-ready. Exit cap rates for non-trophy now modeled at 9–10%+, vs ~6% pre-COVID.
Record-high 20.7% national office vacancy resets underwriting.
Flight-to-quality favors Class A; B/C stock risks obsolescence.
Refinancing wall of $290B exposes lenders, especially regionals.
Office valuations 20–30% below peak; spreads wide, liquidity thin.
🛠 Operator’s Lens
Refi. Pursue extensions early, with partial paydowns/interest reserves. Caps priced off 7–8% debt.
Value-Add. Invest in TI/LC-heavy repositioning only if submarket absorption supports. Keep 15–20% contingency.
Development. Pause new office; only build-to-suit or mixed-use preleased viable.
Lender POV. Banks/CMBS demanding recourse, higher DSCR, lower LTV. Trophy assets still financeable; rest face equity gap.
Vacancy expected to peak ~21.6% by late 2025 [Source: FacilitiesDive].
Loan distress to escalate as 2026–27 maturities near; expect note sales, deed-in-lieu.
Possible cap rate stabilization for prime assets by 2026 if rates ease.
Long-term: bifurcation entrenched; conversions and write-downs reshape stock.
Reuters/Moody’s quarterly vacancy survey. Yardi Research/Allwork.Space dataset.
showing the share of B/C office properties with ≥10% cap rates declining from 74% in H2 2024 to 71% in H1 2025.
