From Matthew Haugen
Office Outlook: Why the Most Hated Property Type May Offer the Best Returns
“Office” has become a dirty word in commercial real estate. Once institutionally favored, the office sector came under intense pressure during the pandemic as remote work, rising vacancies, and capital market volatility converged. However, as of early 2026, stabilization across demand, supply, and capital markets suggests high‑quality office assets may be at an attractive entry point for long-term investors.
And while there is concern about AI disruption in future office demand, many experts believe that productivity gains will allow firms to reinvest in expanding their teams and footprints, while increasing demand for collaborative, high-tech environments where specialists can brainstorm and manage complex systems in person. Indeed, most tenants today continue to sign longer-term leases— typically five to ten years—particularly in higher-quality office buildings.
Demand: Structural Forces Are Reducing Vacancy
Office Vacancy Outlook Improves from Last Year
Office demand is stabilizing and beginning to recover, driven by a convergence of behavioral, corporate, and economic forces rather than a single catalyst. After peaking in mid 2025, national vacancy rates have begun to decline, supported by positive net absorption and strengthening performance in Class A and prime assets. Importantly, this recovery is being led by quality, location, and functionality.
Leasing activity reached a new post-pandemic high in late 2025, increasing approximately 5% year-over-year, with large-scale transactions up 15% as tenants re-engage in longer-term planning. Net absorption turned meaningfully positive in the second half of 2025, reflecting net-new occupancy gains.
Return-to-office (RTO) mandates remain a primary driver of the office recovery. After several years of experimentation with fully remote work, employers are increasingly requiring three to five days of in-office attendance to support collaboration, training, innovation, and corporate culture.
This shift is being reinforced by a growing list of large employers across technology, finance, and professional services, including Amazon, Dell, Microsoft, Instagram, and Home Depot, that have formalized stricter RTO policies.
Supply: Structural Constraints Are Shrinking Inventory
Office Conversions and Demolitions vs New Supply Deliveries
While demand is improving, supply conditions are even more structurally supportive. New office construction remains at multi-decade lows, with a limited pipeline expected in 2026 as higher interest rates, elevated construction costs, and constrained financing have curtailed speculative development across most U.S. markets.
At the same time, existing office inventory is being permanently removed from the competitive set. Older and less functional office buildings are increasingly being converted to residential, life science, medical office, mixed‑use, or data center uses, while others are being demolished altogether. These changes are structural rather than cyclical; once removed, this space is unlikely to return to traditional office use.
Owner‑user acquisitions are further accelerating this dynamic. As pricing has reset, corporations are increasingly purchasing office buildings for their own occupancy, removing space from the leasing market entirely. Owner-users, historically 5%-8% of buyers, now account for approximately 13% of office acquisitions. Together, these forces are steadily tightening effective supply and supporting long-term fundamentals for high- quality office space.
Capital Markets: Reset Valuations, Lender Appetite, and Institutional Demand
Since peaking in 2022, office valuations in many markets have declined by 35% or more, driven by rising interest rates, uncertainty around work patterns, and forced selling tied to loan maturities. While painful in the short term, this correction has re-established rational pricing and created an attractive entry point. Many assets can now be acquired well below replacement cost with going-in yields that were unattainable just a few years ago.
Lender sentiment is also improving, particularly for selective, high-quality assets. Commercial mortgage originations are forecast to surge 27% to $805 billion in 2026, driven by stabilizing property values and maturing loans requiring refinancing. Regional banks, credit unions, and private credit providers are reentering the office market with greater conviction, offering higher leverage and more flexible structures for assets with diversified tenancy, longer lease terms, and modern configurations.
Institutional capital is also re‑engaging following a period of caution. Transaction volumes are rising, fundraising activity is improving, and nearly half of investors indicate plans to increase office allocations in 2026. Today’s reset in valuations combined with improving lending conditions makes office one of the few property types that can achieve meaningfully positive leverage, where stabilized cash yields exceed borrowing costs and amplify cash‑on‑cash returns. Historically, office recoveries have been swift once capital markets reopen, rewarding investors who acquire during periods of pessimism through both operating upside and valuation expansion.
Strategic Investment Opportunities
- Class A and prime assets in resilient markets, where vacancy compression and rent growth are strongest.
- Well-located, transit-accessible properties with modern amenities that align with RTO-driven demand.
- Opportunistic strategies focused on upgrading secondary buildings or pursuing selective repurposing where fundamentals support alternative uses.
Among preferred markets, Texas continues to stand out. Dallas-Fort Worth benefits from robust job growth, population inflows, and a diverse economy, while Austin remains a leading technology hub with surging demand from companies like Tesla and Oracle. Houston offers long-term potential with lower entry costs and persistent energy sector demand.
In California, the San Francisco Bay Area remains a top target, with declining vacancies in San Francisco and Silicon Valley supported by renewed AI and technology leasing. San Diego also stands out, with strong submarkets such as La Jolla, Del Mar Heights, and UTC exhibiting positive Class A absorption and rent growth of approximately 6.3% year-over-year. Limited new construction and continued flight-to-quality trends position these markets for vacancy compression and rent resilience.
Current Investment: Tollway Plaza
Buchanan Street Partners currently owns Tollway Plaza, a two-building, 370,000-square-foot Class A office property in North Dallas. The investment exemplifies many of the favorable market dynamics discussed above, particularly the post-pandemic flight to quality among corporate tenants seeking to re-establish in-office collaboration in high-quality environments.
Over the past five years, Tollway Plaza has captured more than 200,000 square feet of leasing activity, reflecting sustained tenant demand for well-located, institutional-quality space. Rental rates have increased by more than 30% since 2020, and occupancy surpassed 90% in early 2026—up from the low-to-mid-70% range in 2020 and 2021—significantly outperforming much of the competitive set.
Conclusion
As of early 2026, the office sector stands at a compelling inflection point. Stabilizing demand, accelerating RTO enforcement, structurally constrained supply, discounted valuations, improving lender appetite, and renewed institutional interest have created a rare window for investment. While challenges persist for lower-quality assets, high-quality buildings in strong markets are demonstrating resilience and recovery.
For disciplined investors focused on quality and longterm fundamentals, office is no longer a dirty word, it is a compelling, income-oriented opportunity positioned for durable returns.