Beyond survival: Charting the future of office investment

By Kevin Lott

For the past several years, the mantra for office investors and service providers has been “Stay alive to ’25,” echoing the mantra from the early 2000s to “Stay alive to ‘05.” Now that the calendar has turned to 2025, a date that seemed so far away in 2021 and 2022, signs are pointing towards an acceleration of pricing discovery leading to more asset trades and the dawn of what some have deemed as the “Great Basis Reset.” The return of leasing demand to above 80% of pre-pandemic norms along with the growing number of high profile return to office (“RTO”) mandates provides optimism for a broader recovery in the office sector.

Despite some more positive news covered by my colleague Beau Jones in late January, the office sector continues to encounter significant challenges to values with post-pandemic uncertainties that demand careful navigation and strategic execution as the market moves from extensions to resolutions. This article further explores the current dynamics specifically affecting office debt holders, investors and operators, and the potential impact of shifting strategies to a more proactive and decisive approach to asset management that safeguards values in the recovery phase of the real estate cycle.

If the office market is truly starting the recovery cycle, what trends and steps should legacy holders of near-term office debt maturity consider to best steward asset values in 2025? Let’s start by framing up the current market conditions as a context for exploring effective strategies.

Recovery progress

Liquidity is returning to the market in part due to increasing availability of debt for the office sector. More assets are expected to trade in 2025 and 2026 as various capital sources search for higher yields, and more forced dispositions come to the market. Debt is more competitive than it was in 2023 and 2024 as long as the asset meets market preferences for core product (over 85 percent leased), 50 percent or less loan-to-value (LTV), limited near-term tenant rollover exposure and a weighted average lease term (WALT) over five years.

In general, pricing discovery is becoming easier as the increase in recent asset trades set concrete data points on value. Appraisals now more accurately reflect current values, setting more realistic pricing expectations with a clearer path to values, helping the capital stack recognize who has equity control of the asset and resulting decision matrix. This either avoids or significantly shortens the fight over control of the asset decisions and can speed up the resolution process significantly.

Opportunities to stabilize an office rent roll are more readily available in 2025. Tenants have been in limbo for a significant period leading to anxiety and instability. At the same time, tenants have become more aware of their long-term commitment to the office and how it fits into their corporate culture.

While some near-term lease expirations still require over 20 percent downsizing, which is capital intensive and disruptive to the workplace environment, an increasing number of occupiers are projecting future growth.

Recovery headwinds

The delays in reaching the point in the cycle that sets the pricing bottom have contributed to the deterioration of asset values. Longer hold periods raise the potential of defensive capital price impairment due to shorter useful life for key components such as elevators, façade sealants, HVAC equipment, and roof warranties. The options on the debt market are more costly for value-add office with significant capital requirements to stabilize the rent roll.

Owner-operators face financial pressures due to maturity defaults and recently historically declining office values. These pressures have presented potential crossroads regarding compensation and survival, necessitating complex decisions to ensure viability. Owner-operators must carefully assess their financial positions and explore strategic options to navigate these challenges, balancing immediate financial needs with long-term sustainability.

Debt challenges remain in the office market particularly for value-add assets in the 50-70 percent leased range that require significant capital to execute business plans. These challenges have been further exacerbated by declining values and impending debt maturities with LTV and debt service coverage ratio (DSCR) requirements an ongoing concern for both existing loans and replacement debt. Investors and operators must develop robust strategies to address these challenges, exploring refinancing options and leveraging strategic partnerships to maintain financial stability.

Transition strategies to more proactive and decisive asset management

Extended holding periods for office assets have become a defining feature of the current market, impacting asset values and investor strategies. As the market adjusts to new realities, asset improvements intended as preparation for a sale may not yield the expected returns, prompting a re-evaluation of exit strategies. The rise in lender-driven sales and the entrance of different buyer profiles, including opportunistic all-cash investors, further complicates the landscape. Debt holders and investors must be prepared to adapt to these shifts, understanding the motivations and strategies of diverse market participants maneuvering to take advantage of the best investment opportunities while competition is reduced.

Two specific areas that will have a return on your time invested as part of your proactive and decisive asset management strategy are: 1) enhancing your tenant communication and interaction, and 2) understanding the physical capital needs impacting existing tenants and future prospects. Properly matched capital allocation aligned with a strategic holding period are paramount for office investors seeking to navigate current challenges and preserve asset values.

Effective tenant management, particularly with rolling leases, is critical in maintaining asset stability and value. Office tenants previously struggled to determine long-term office needs due to differing opinions between the C-Suite and the general workforce on the value of the office attendance. In the past 12-24 months the path forward continues to be clarified, and space requirement decisions are leading to leasing decisions being increasingly followed. Ownership instability or uncertainty frequently further impaired communication between the landlord and tenant leaving tenants to wonder at how to solve the reality of their changing space requirement. Needing a landlord partner to support efforts to make the office “commute worthy” was often complicated by lack of capital to address the issues. Simply stated, enhancing transparency and trust with tenants can mitigate risks and foster long-term relationships, crucial in a market characterized by uncertainty. Investors must prioritize clear communication and proactive engagement, ensuring that tenant needs and market realities are effectively balanced.

How can you define and drive the proactive and decisive asset management strategy?

1. Begin with the end in mind as the business plan is determined. Chart the preferred and reasonable asset outcome given any timing constraints to understand the horizon to complete your strategy.
2. Assess the current condition of asset to achieve the desired outcome. What can be patched or repaired in a timely manner and what requires more capital or time than you are willing to expend? With the understanding that today’s new office investors are focused on limiting uncertainty as they evaluate acquisitions, what are the near-term defensive capital concerns that need to have a defined scope and pricing to remedy that can be shared during the disposition process? Is there access to capital to execute on the plan while eliminating uncertainty that would impair value in a disposition?
3. Discovery of challenges and opportunities driven through communication with the stakeholders.

• Tenants: What is their commitment to their office space and what do they need addressed to achieve their corporate culture and workforce retention goals? Tenants are often left wondering about the status of the building and whether ownership has the financial means to maintain a workplace that is comfortable and inviting as they try to lure their employees to return to the office. Does the current space need to be re-configured or rightsized? Given rising capital costs and budgeting constraints for tenants, are there opportunities to shore up the rent roll with a more measured capital expenditure?

• Property management: What are the consistent irritants impacting your tenants and what are the costs to resolve? What preventative maintenance can extend the useful life of key equipment such as the cooling tower, HVAC air handlers, façade, roof, and elevators? What systems are extended way beyond their useful life and contributing to tenant aggravations that may impact commitment to renewal discussions? Are there alternatives to approaching those systems using more measured capital?

• Leasing: What are the opportunities to recruit other tenants and to retain those that are on board? Is there vacant space in optimal showing condition to market to prospects?

• Operating partners: Who can help you execute and stay on course, as both the navigator and execution driver?

Trimont’s role in supporting office clients

At Trimont, we offer tailored advisory services to meet the unique needs of the office sector, removing the bias of commission-based compensation. Our advisory service focuses on shepherding strategy development to protect and enhance asset value, emphasizing client engagement with a deep understanding of the mindset of the equity investor. We work closely with clients to develop and execute solutions that face market challenges, leveraging our team’s expertise to provide actionable insights and support.

As we navigate the evolving landscape of the office sector, it is crucial to embrace a proactive and strategic approach to asset management. The current market conditions, marked by both recovery opportunities and lingering headwinds, demand thoughtful stewardship and clear communication between debt holders, investors, and operators. To preserve asset values, it is important to focus on effective tenant communication and proactively address physical capital needs. Emphasizing transparency and trust in tenant relationships will further mitigate risks and help create long-term partnerships.

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