• National US office vacancy climbs to 19% in Q2 2024 (up 90 bps YoY).

• Effective rents fall 4.1% YoY, led by coastal CBDs and Sun Belt metros.

• Net absorption turns negative at –34 million sf in first half 2024.

• $7.2B in office sales closed YTD, down 38% versus 1H 2023.

• Debt service coverage ratios strain below 1.2x for over 28% of office loans.

The US office sector is undergoing a recalibration as vacancy rates reach 19%, reinforcing a value reset across major and secondary markets. This elevated slack is pressuring underwriting standards, sparking a filtering of capital away from challenged assets, and accelerating value discovery among institutional holders. As investors grapple with negative net absorption and falling transaction volumes, price discovery is an active—rather than academic—process. "It's all about tenant leverage right now," noted a Boston asset manager, referencing 18 straight months of declining effective rents. In this landscape, office pricing remains reactive, not resolved.

On a national scale, office leasing continues to reflect both cyclical softness and secular transformation. Net absorption registered –34 million square feet year-to-date, the sharpest contraction since 2021’s early pandemic phase. Meanwhile, new large-scale lease signings—over 100,000 sf—are down 22% YoY, with tech-centric markets like San Francisco and Seattle tallying the weakest demand. By contrast, high-amenity submarkets in the Sun Belt (Austin, Miami) report sub-14% vacancies but are now seeing deal terms lengthen by 3–6 months per negotiation. The message is clear: downside risks to rent, upside for tenants.

Trading volumes illustrate shifting investor risk tolerance. Through May, volume reached $7.2B, off 38% from the first half of last year as buyers and sellers continue to reprioritize. On balance, average cap rates in primary markets widened 52 bps in twelve months to 6.7%—and up to 8.1% for non-CBD product. Lender discipline follows: banks increased spreads by 35–45 bps on new office loans, with proceeds now modeled to a 1.4x DSCR versus 1.2x pre-pandemic. In practice, this narrows the investable universe, favoring cash buyers or those pursuing value-add at distressed levels.

Beneath the headline numbers, capital is testing the “true floor” for office values. According to Green Street, average NCREIF office values declined another 11.3% YoY, eroding equity as debt maturities loom. A recent Chicago CBD trade cleared at $143/sf—down 42% from its 2018 sale price. Still, trophy towers in New York and Austin are fetching premium pricing, conditioned on full-floor tenancy and modern HVAC upgrades. Ultimately, capital flow is local: market winners maintain occupancy and command, while others confront accelerated markdowns.

Rising vacancies have direct implications for credit performance. Trepp data shows over 28% of office CMBS loans now report DSCRs below 1.2x—crossing into active watchlist status. As a result, lenders are limiting extension options, rebidding loans, or—where recovery ratios are thin—preparing for consensual foreclosure. Meanwhile, private credit funds are selectively targeting high-yield loan purchases as banks retreat, particularly in markets where occupancy has stabilized above national averages. The next 9–12 months will test both liquidity and risk frameworks.

Looking ahead, pricing signals suggest a continued bottoming process rather than imminent relief. If demand for flexible and upgraded space holds steady, absorption losses could moderate late in 2024. Should rates ease into 2025, expect some core-plus repositioning capital to re-engage, particularly in high-growth metros. For now, underwriting remains defensive: higher cap rates, compressed loan proceeds, and intensive sponsor scrutiny. The office sector’s adjustment will remain case-specific, asset by asset, as capital choices harden around tenancy, location, and credit.