The office market has seen dramatic transformations in recent years. Post-pandemic shifts in workplace trends and economic uncertainty are reshaping the playing field. Yet amid the challenges, there are significant opportunities for borrowers, mortgage brokers and lenders to capitalize on undervalued office properties. For commercial mortgage brokers, situational awareness is vital to harness the potential of these assets.
Increasing hybrid work models and tenant demand for higher-quality spaces are driving significant vacancies in Class B and Class C properties. Owners burdened by rising operational costs, deferred maintenance, and declining demand are offloading these assets at deep discounts. Mortgage brokers and their borrowers who act strategically can position themselves to benefit from these conditions while contributing to the market’s stabilization.
The U.S. office real estate market continues to face significant challenges. Foreclosures have risen, vacancy rates remain elevated in many markets, and lenders have tightened underwriting standards. The result has been a wave of distressed sales, particularly among properties that no longer meet modern tenant expectations, are far from where employees reside or are in congested areas. This devaluation stems from a combination of factors, including reduced tenant demand, rising operational costs, and flight to quality.
Tough times
National vacancy rates reached a record high of 20.9% at the end of 2024, according to Cushman & Wakefield data. That vacancy rate was partially driven by 26 million square feet of negative net absorption in 2024.
Tenants are migrating to Class A properties, leaving Class B and Class C buildings underutilized and financially unviable for their owners. Investment-grade multi-tenanted buildings targeting traditional office tenants have seen values drop between 40% and 50% since their peak, with cap rates rising by 200 to 300 basis points. For example, buildings once valued at $120 per square foot are now commonly transacted at auction for as little as $40 per square foot.
“For borrowers and investors, this environment presents challenges and opportunities.”
For borrowers and investors, this environment presents challenges and opportunities. With $36 billion in office transactions recorded in 2024, a year-over-year increase, private and corporate buyers have taken the lead, often acquiring properties at steep discounts through auctions or private transactions. This trend coincides with a surge in foreclosures and distressed sales, and another $28 billion in CMBS loan maturities are expected in 2025.
Savvy investors can acquire these assets, implement strategic improvements and reposition them for long-term profitability. Establishing a workable adjusted basis and ensuring debt service aligns with current market conditions can create more favorable financial outcomes while capitalizing on the opportunities presented by distressed sales and maturing loans.
With vacancy rates projected to continue climbing into 2026, identifying undervalued assets, and executing informed repositioning strategies is essential. Investors and borrowers who adopt a data-driven approach leveraging insights into tenant behavior and market-specific supply and demand trends will prevail.
Promising office properties
Despite widespread narratives of the “death of the office,” certain market segments remain resilient and promising. Industries such as health care, technology, professional services and aerospace engineering continue to require office space for their operations. Businesses needing collaborative environments for training, team building and customer interaction also recognize the value of maintaining physical office locations.
Additionally, the economic reality of acquiring office space today is more favorable than in decades. Borrowers can purchase buildings at a fraction of their former cost, benefiting from an immediate cost-basis advantage. For owner-occupiers, this presents an opportunity to control operating costs, stabilize overhead, and potentially generate additional revenue by leasing excess space. Meanwhile, opportunistic investors can purchase properties with value-add potential, implementing improvements to attract tenants and improve cash flow.
A notable trend is the increasing appeal of owner-occupied office buildings. Businesses that previously leased office space are exploring ownership to gain greater control over their real estate expenses. For instance, a company occupying 50,000 square feet in a building can purchase a 100,000-square-foot property, using the excess space as a revenue-generating asset.
This dual role as occupant and landlord offers businesses stability and an additional income stream. The following are some examples of successful acquisitions:
● 20 E. Thomas Building, Phoenix: U-Haul acquired the Class A 25-story skyscraper in Phoenix for $23.7 million in December 2024 — the building sold for $77 million in 2006.
● 616 FM 1960 Road W, Houston: In November 2024, this 8-story Class A building sold at auction. While the final sale price was not disclosed, the asking price was $850,000. It had previously sold in 2010 for $7 million. Built in 1982, it was only 55.9% leased at the time of sale.
● 135 West 50th St., Manhattan: In August 2024, the 23-story office building in Midtown Manhattan sold at auction for $8.5 million — a 97% discount from its $332 million purchase price in 2006. The Class B building, constructed in 1963, was 65% vacant.
Mortgage brokers
These conditions allow mortgage brokers to be indispensable advisers to borrowers considering an office property acquisition. Today, brokers must do more than connect borrowers with lenders. They play a crucial role in crafting creative solutions, bridging valuation gaps and addressing the unique challenges of distressed office properties.
Brokers can help guide borrowers through issues surrounding distressed properties. Often such properties come with deferred maintenance, high vacancy rates or outdated designs that no longer meet tenant demands. Mortgage brokers can help borrowers assess why a property has fallen into distress and whether those issues can be effectively addressed. For example, properties with deferred maintenance might require significant capital for repairs, while those in less desirable locations may struggle to attract tenants even after improvements.
“(BROKERS) play a crucial role in crafting creative solutions, bridging valuation gaps and addressing the unique challenges of distressed office properties.”
Given the financial complexities of office acquisitions, brokers must identify lenders offering tailored solutions. This can include interest-only loans to ease cash flow during the repositioning phase, flexible draw schedules for funding tenant improvements and loans with interest-carry provisions to reduce short-term financial pressures. Some lenders now underwrite office properties at lower occupancy rates — typically 65% — to reflect current market realities, allowing borrowers to secure financing for assets that would otherwise not meet traditional lending criteria.
Brokers can also help educate buyers and sellers about the current market. One of the most significant challenges in today’s office market is the bid-ask gap. Many owners struggle to accept that their properties are worth significantly less than before. Brokers must serve as educators, providing sellers with market data, third-party appraisals and sensitivity analyses that demonstrate the realities of current valuations. For underwriters and buyers, brokers can present a comprehensive picture of the property’s potential, from its income-generating capabilities to the broader market trends that support acquisition.
Strategic considerations
While the market offers substantial opportunities, borrowers must approach office property acquisitions with a clear strategy and a focus on long-term viability. Several factors should guide their decision-making.
The importance of location has never been greater. Tenants prioritize buildings near walkable amenities, public transportation and vibrant communities. Properties in suburban areas or secondary markets with strong population growth may also offer higher returns than traditional central business districts.
Modern tenants want access to lounges, gyms, outdoor areas and shared conferencing facilities. Properties lacking these features may require significant investment to remain competitive. Borrowers should carefully evaluate the cost of upgrading properties to meet these expectations.
Understanding the tenant mix and lease terms is critical for properties with existing tenants. Brokers should help their clients review rent rolls, evaluate tenant financials and assess lease expirations to determine the property’s stability. Diversified tenant bases with staggered lease expirations are preferable, as they reduce the risk of large-scale vacancies.
Repositioning Costs
Distressed properties often require extensive renovations to attract tenants. Borrowers must account for these costs in their financial models and work closely with brokers and lenders to secure financing solutions that support value-add strategies.
Operating costs must be examined closely. High property taxes, insurance premiums and maintenance expenses are significant hurdles for many office properties, particularly in high-tax states. Borrowers should work closely with brokers and lenders to evaluate these costs and determine whether a property’s income potential justifies the expense.
Outdated properties with inefficient layouts or insufficient technology infrastructure may struggle to attract tenants. Borrowers must assess whether these issues can be addressed cost-effectively and if there is a long-term vacancy risk. Economic volatility adds complexity to financing and acquisition decisions. Borrowers must remain vigilant about market trends and work with experienced mortgage brokers to mitigate risks.
The office market may be experiencing a period of uncertainty, but for borrowers and their mortgage brokers, this moment represents an unparalleled opportunity. Properties that were once out of reach are now attainable and the potential for value creation is immense. However, success demands a careful, informed methodology that balances strategic planning, creative financing and an awareness of tenant needs. Partnering with knowledge- able mortgage brokers and lenders, borrowers can acquire assets that meet their immediate needs and reposition them for long-term growth.
