BXP chief says the office sector has bottomed, but buildings still need to be demolished

U.S. office vacancy ticked down 20 basis points to 18.8% in Q3 (CBRE)—the first year‑over‑year decline since early 2020—as leasing outpaced the five‑year quarterly average driven by financials and tech and the construction pipeline heads toward its lowest annual total in over a decade. BXP CEO Owen Thomas says 2024 likely marked the bottom as lower rates and returning capital, including large single‑asset securitizations, revive debt markets; the sector is sharply bifurcating with the top 10% of “premier” buildings seeing roughly 11% vacancy and 55% higher asking rents while secondary stock struggles, prompting some landlords to retrofit B assets but leading institutional owners to favor new, high‑quality development (BXP recently launched a $2bn project at 343 Madison Ave). Residential conversions work in high‑rent markets like New York (helped by tax incentives) but won’t resolve nationwide overbuilding, implying investment opportunities are concentrated in premier assets and selectively upgraded properties.

Analysis

CBRE reported U.S. office vacancy fell 20 basis points to 18.8% in Q3, the first year-over-year decline since Q1 2020, with leasing activity above the five-year quarterly average driven by financial services and technology firms and the construction pipeline headed toward its lowest annual total in over a decade. These data points indicate a nascent recovery in demand concentrated in higher-quality assets rather than broad-based market improvement.

Owen Thomas, CEO of BXP, said 2024 likely marked the bottom as lower interest rates have begun to restore capital access, evidenced by recent large single-asset securitizations and BXP’s own deals in New York City and Boston. BXP’s strategy emphasizes premier buildings (top ~10%), which show roughly 11% vacancy and 55% higher asking rents, while the firm is deploying capital into new development such as the $2 billion 343 Madison Avenue project rather than buying lower-tier stock.

The market is bifurcating: premier core assets and transit-proximate properties are re-leasing and commanding outsized rent premiums while secondary buildings lag and face structural oversupply; conversions to residential are financially viable in high-rent markets with incentives like New York’s but will not solve national overbuilding. Key risks are persistent vacancy in non-premier stock and the need for sustained leasing momentum and financing conditions to support valuations and new development returns.

Key Decisions for Investors

• Favor exposure to premier, transit-proximate office assets in gateway markets where vacancy (~11%) and asking rents (≈55% premium) are outperforming, consider selective acquisitions or increased weighting in high-quality office REITs like BXP where applicable
• Underweight or avoid secondary/commodity office assets absent clear value-add plans; if holding exposure, require strict underwriting on conversion economics or committed capex to attract financial and tech tenants
• Stage capital deployment and monitor debt-market activity (single-asset securitizations), interest-rate direction, leasing velocity by sector (financials/tech), and local policy incentives (e.g., NYC conversion tax breaks) before increasing allocations