Office is Not Dead. Office is Alive.

As the industry continues to recover, new development is low, further reflecting a slowdown driven by shifting workforce patterns, such as hybrid or fully remote models. Limited new development is likely to lead to a future emphasis on the viability of retrofitting older office spaces to meet the demands of a more digital and modern workplace. In Northern California, office markets are adjusting to smaller, but more targeted demand, while in Southern California the picture is mixed. Spencer B. Kallick, a partner at Allen Matkins speaks to Pendulum Property Partners' Dan Wagman to analyze current and future office sector trends found in the Winter 2025 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey.

Spencer B. Kallick: Dan, why are you buying office buildings right now, with so many afraid of the sector post-Covid?

Dan Wagman: Well, there's a change in the amount of office space people are consuming, but office as an asset class is not going anywhere, so we're trying to lean into something that we're frankly good at as an operator. Anyone who has bought an office deal outside of the last 15 to 18 months probably has all their equity wiped but it still sits on someone's books. It still needs to be operated, still needs to be leased. People like Allen Matkins, for example, and a lot of other tenants are still utilizing their space so we're trying to figure out how to best serve our clients.

SBK: What are tenants looking for in today’s leasing environment?

DW: It is one of, if not the most, tenant-friendly markets that we've seen, but there are still deals getting done. The things that we're seeing right now in the market are twofold. One, there is demand for move-in ready, as-is space that is high-quality, with some shorter-term outs and month-to-month extensions. Two, you are seeing the flight to quality. I think there is a very important distinction between trophy and Class-A, and the flight to quality is where people are paying top-of-market rents.

SBK: What are some of the trends you've seen in the last 6 to 9 months?

DW: I think the biggest change in velocity or the impetus for velocity has been basis being reset. So, as deals trade, as lenders take things back, as lenders sell deals, and as equities are wiped, people will meet the market on rent unless you are the trophy building in a high-value sub-market. If you're a first mover, you're typically going to win. The landlords that have been flexible have been the ones that win. But it's not that easy. There is a misalignment of incentives right now if you have a high basis.

SBK: Where are you seeing the most evolution in 2025?

DW: In LA if you can find the best or close to the best asset in any sub-market, and if you can buy it at a basis that allows you to undercut the market on rents and you can be a first mover, you are going to win the musical chairs race and get tenancy. The question is, how do you exit? Bigger is harder right now. It's harder from a leasing perspective, and it's harder from an exit perspective. Being smart on the exit and really thinking about who your buyer is in the future, that's what we're focused on.

SBK: Post-Covid, what are some of the continuing issues you're seeing with office?

DW: I think the thing that has forever changed is the utilization of office. Tenants are waiting to make decisions and landlords are giving them time to do so. The bigger issue is over the next two to five years, you are going to see a lot of rightsizing. And I think the other thing that people aren't talking enough about is our general capital markets situation. The big companies put a freeze on hiring as soon as interest rates started rising in 2022. I think you're going to see these larger tenants, as things stabilize, start to think longer term again.

SBK: What do new deals and refinancing deals look like compared to even just a couple of years ago?

DW: Today most equity is wiped on deals. However, lenders are realistic and will talk about different ways of refinancing. You are seeing capital available for new acquisitions or for some refinancings. The debt funds, including some big-name brands, are starting to open up for assets in the best locations that are high quality and relatively new construction. You're starting to see CMBS open up as well, but it is not a silver bullet, and in CMBS, they're not necessarily giving credit for subleasing as they think about their debt yield. Equity is likely needed in a lot of these situations.

SBK: Dan, if we're sitting here a year from now, what do things look like in the office sector?

DW: In 2025, I think you're going to see lenders run out of options with existing borrowers, but you're also starting to see leasing velocity picking up a little bit. I think you're going to see more deals trading hands. People will be taking more assets back. More equity will go in to buy down a basis. And all of this means that I think more deals will get done. But I think we've all been lying to ourselves about rents. You're going to see rents decrease, and that's okay. We frankly need that. We've seen a lot of landlords make net-effective rent decisions that I think make no sense. We need a little reset. But my big guess for 2025, not a prediction, it's a guess: You are going to see those rent decreases really start to show up on our leasing reports.

SBK: Anything else on your mind about the office sector as we head into 2025?

DW: Office is not dead, office is alive. It's not well, but it will be. It takes time for things to flow through the system. You're starting to see the right type of capital flowing a little bit more, and I think people who buy things in 2025 will be really happy with themselves long term.