Is the US Commercial Office recovering or going to crash further in 2025? I guess the answer is it depends on who you are asking this question. Long suffering unit-holders of Manulife US REIT, Prime US REIT and Keppel Pacific Oak US REIT have seen their investments pummeled to just a tiny fraction of their original investments. Worst still, distributions have been cut or halted for a long time. On one hand, the higher interest rate environment effect is still ongoing even in 2025 as some office landlords need to refinance their previous locked in offices loans at the current higher rates. On the other hand, there are lesser office supply coming online as well as surge in conversion of office into residential uses which lead some to believe that 2025 will be the market bottom for the US Commercial Office sector hence a rebound is imminent going forward.
1. The case for market crash of US Office REIT in 2025 and recovery only from 2040.
The Straits Times on Nov 21, 2024 has published an article that has a forecast by Capital Economics that United States office buildings are unlikely to regain their peak pre-pandemic values until at least 2040 as demand for desk space weakens. It further mentioned that values of these offices are expected to plunge by 35 per cent from the peak by the end of 2025 and take an incredulous 15 years or more to recover! This seems to be an extremely pessimistic view. This is also in total contradiction to the view of CBRE and Jones Lang Lasallee.
2. The case for belief that the US commercial office market has bottomed in Q4 2024.
I thought that the global real estate and investment managmeent group of Jones Lang LaSallee USA ("JLL") has gathered pretty interesting hardcore statistics to back up the case that US office market has bottomed in Q4 of 2024 and that 2025 may see the start of recovery of the office market. One can read more of it here for their report.
<Quote from JLL>:
The culmination of 2024 marked another key development in the recovery of the U.S. office market—as leasing activity has accelerated over the course of the year, Q4 was the first quarter of positive net absorption since Q4 2021, and just the second quarter of occupancy gain since the onset of the pandemic in 2020. Leasing activity has established post-pandemic highs for the past three consecutive quarters, and Q4 volume reflected more than 92% of pre-pandemic averages.
</Quote from JLL>
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| Demand has returned to pre-COVID with Net absorption positive in Q4 2024. |
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| Supply Reduction & Employer Pressure Return to Office |
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| US Office Supply Reduction via Conversion of office to residential, revedopment and Demolition |
Parting Thoughts
Personally, I though that the US Office market has bottomed given that Q4 2024 positive net absorption confirmed the Q3 2024 signs of rebound with the shifting patterns of office attendance and US Fed interest rate cuts in September 2024 and November 2024 driving slightly more favourable conditions for US office landlords. Nevertheless, I do not think it will be an instant recovery in 2025 and may take a few years for recovery. So US office REITs are not out of the wood yet. I have continued to hold my stakes in Keppel Pacific Oak REIT but will not be adding more units. I do hope that once Elon Musk and his Department of Government Efficiency start axing many US government employees that are stubbornly still working from home albeit the lack of productivity, it will send a message to the private sector employees to get back to office to work- the US office market may recover strongly in 2025 onwards if this is the case.
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