Office investor demand was way up in the first half of 2025, according to exclusive JLL data

The U.S. office market is exhibiting a robust capital markets recovery, with first-half transaction volume up 42% year-over-year to $25.9 billion and JLL's specific sales volume more than doubling, signaling a shift from 'office curious' to 'office serious.' This momentum is driven by lower interest rates, a 50% increase in transaction bids, and a significant rise in demand for larger, high-quality assets, complemented by opportunistic buying in distressed segments. A severe shortage of new supply, with only 6 million square feet projected for next year, and stabilizing tenant downsizing further underpin this trend, suggesting potential for higher leasing metrics and valuations, despite macroeconomic weakness posing a potential future demand risk.

Analysis

The U.S. office market is demonstrating a significant capital markets recovery, with first-half transaction volume rising 42% year-over-year to $25.9 billion, a trend JLL's proprietary data reinforces with a 110% increase in its own office sales volume. This momentum is attributed to a shift from passive interest to active investment, propelled by lower interest rates and a 50% increase in bids per transaction. Institutional appetite is returning, evidenced by a 130% surge in deals over $100 million, primarily targeting high-quality assets. A notable 'barbell effect' is also in play, with opportunistic capital acquiring distressed properties at steep discounts, such as $50 per square foot versus a previous $300. This recovery is supported by strong fundamentals on both the supply and demand sides. A severe supply constraint is imminent, with new deliveries projected to fall 90% below the post-GFC average to just 6 million square feet next year. Concurrently, demand is stabilizing, as corporate space reduction upon relocation has plummeted from nearly 20% to just 3%. While this paints a bullish picture for valuations and leasing metrics, a key risk remains: the economic weakness driving lower interest rates could eventually dampen tenant demand, creating a headwind for the sector.

Key Decisions for Investors

• Investors should consider increasing exposure to the office sector, as strong capital transaction momentum, stabilizing tenant demand, and a severe impending supply shortage suggest a favorable multi-year outlook for valuations and rental rates.
• Focus on a bifurcated strategy, either targeting best-in-class office assets that are attracting institutional capital or, for higher risk tolerance, exploring deeply distressed properties where a low-cost basis offers a competitive advantage.
• When evaluating public REITs, note the divergent performance, with BXP, Vornado, and SL Green showing recent strength, while Alexandria Real Estate Equities (ARE) is identified as a laggard, warranting specific due diligence.
• It is crucial to monitor macroeconomic indicators for signs of deepening economic weakness, as this poses the primary risk to tenant demand and could offset the positive impact of lower interest rates and tight supply.