While some office properties will continue to struggle, others could benefit from increased return-to-office efforts at major companies
While the commercial office space is still facing headwinds early in 2025, there are signs of a turnaround in progress, with class A and B office properties providing a great opportunity, according to one industry expert.
It has been a challenging stretch for the office real estate market, which is still trying to rebound from the pandemic when so many companies fled office space to work from home. A recent report from Commercial Edge noted that the national office vacancy rate rose to 19.9% in March, a 170-basis-point increase year-over-year.
Alex Horn (pictured top), managing partner of BridgeInvest, admits it’s been a tough stretch for class C and some class B properties.
“There are still a lot of challenges ahead,” Horn told Mortgage Professional America, “simply because how we use offices as a country has changed, especially in those B and C offices. We need to have supply destruction in the C-class office and the B-class office, because there’s just not as much of a need for it now as we’ve had in the past.”
However, for class A and some class B office space, Horn believes there is a good opportunity for a rebound in those markets as 2025 continues.
“The reason why we like it is that there are very good class B and class A offices, in good markets, which is a really interesting opportunity,” Horn said. “Especially for class A users, the expense of the rent on their total budgets is a marginal item. It’s not necessarily making up a big part of their expenses.”
Great opportunity for collaborative companies
For companies that require in-person collaboration to conduct business, Horn believes they will find good opportunities in class A and B office space.
“So those corporations leasing those offices are focused on finding amenity-rich buildings and very good locations, they can attract the talent as they continue to combat this work-from-home employee push,” Horn said. “So those tenants are willing to pay higher prices than they ever have, and it's shown through in strong office markets.”
Horn believes those types of companies will continue to lead a rebound in the commercial office market.
“You're seeing that class A office is actually outperforming what it's been in a very long time,” Horn said. “So, finding opportunities like that is very interesting in office, and we think you'll continue to see a need for Class A office for jobs that require a lot of mental capacity. Jobs where people need to be in the office to collaborate.”
A perfect example of that was the news on Tuesday that Deloitte had committed to a large section of high-end office space in Manhattan.
The commercial real estate space is running into some of the same headwinds that have plagued the residential market. Tariffs have led to fluctuating interest rates, which has caused some companies to put purchase and refinance plans on hold.
Trump’s first 100 days exposed a deep rift in the mortgage industry. Rising rates, tightening credit, and fears over worsening affordability have split experts: those betting on the resilience of housing, and those warning of a looming crisis. https://t.co/UvXilMznGp
— Mortgage Professional America Magazine (@MPAMagazineUS) April 29, 2025
Still, for companies ready to move forward, Horn believes BridgeInvest is in a strong position to help them refinance office mortgage loans or acquire new properties.
“We’re going to see those types of offices continue to improve,” Horn said. “There are very few lenders that are actively in that space. We think we can fill that void. We can help borrowers who need to refinance those positions or buy new acquisitions where that makes sense.”
Increase in the cost of replacement in multifamily market
Another area Horn sees making big gains in 2025 is the multifamily sector. A Mortgage Bankers Association (MBA) report noted a 5.4% increase in multifamily debt at the end of 2024, increasing to $2.16 trillion. It has outgrown the broader commercial real estate sector for 10 straight quarters.
“We’re still very bullish on multifamily,” Horn said. “We think that market is super interesting. In today’s world, we’re saying tariffs are increasing the cost of replacement. Labor costs are going up because of immigration policy. The cost of borrowing from debt because of higher interest rates is also higher.
“All of those lead to a higher replacement cost for most rental projects. So, in turn, existing products are appreciating better.”
The increasing replacement cost makes new development more challenging in commercial real estate. Horn says it must be a “no-brainer” for companies to want to attempt that with the current market conditions.
“The desire for people to buy more land, to take out a construction loan, or even do a rehab of a project is a lot less than it has been in the past,” Horn said.
Even with the challenging market, Horn said that if the conditions are right and the numbers make sense, they’re willing to support that multifamily development.
“When there’s a project we can underwrite, if they can justify their costs, if they can explain how they’re going to push rents, we really find that very appealing today,” Horn said.
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