Office-based Real Estate Investment Trust (REIT) poised for lift-off as employees resume onsite work

Office-based Real Estate Investment Trust (REIT) poised for lift-off as employees resume onsite work

In the heart of 2025, office landlords are grappling with a complex landscape as they navigate high vacancy rates and market uncertainty. This is despite some pockets of optimism tied to the "revenge of the office" trend – the gradual return to office work.

Meta Platforms (META) and Pinterest (PINS) have led the way, walking away from a combined 690,000 square feet of office space in New York and San Francisco respectively in 2021. This trend is echoed nationally, with office vacancy rates remaining elevated at around 19.4% to over 20%, according to recent reports. Major markets like San Francisco and Austin are experiencing even higher rates, with San Francisco's vacancy rate reaching 34.8% in Q2 2025, and Austin hitting 28% recently.

Despite these challenges, there are signs of market activity and adaptation. Rental rates have seen slight year-over-year increases, reflecting some tenant demand. However, this comes amid shrinking new construction starts and a cautious lending environment for office properties.

The outlook for office landlords is mixed. Slow employment growth in office-using sectors and ongoing hybrid work models temper expectations for a full return to pre-pandemic office utilization levels, contributing to persistent vacancies. On the other hand, some markets – especially tech-heavy regions like the Bay Area – see significant office sales activity, indicating investor interest and potential repositioning opportunities. Additionally, there is increasing momentum towards conversion or repurposing of underperforming or obsolete office spaces into alternative uses, which could improve asset values and reduce oversupply over time.

The "revenge of the office" trend suggests growing support for in-person work, but this shift is gradual and nuanced. Remote and hybrid models are expected to permanently alter office demand. Given the current economic and legislative uncertainties, market participants exhibit a wait-and-see stance, injecting conservatism into leasing and investment decisions.

Amidst this landscape, some real estate companies are thriving. Equity Residential (EQR), for instance, yields 4.1% and has interests in nearly 85,000 units in major markets. EQR's occupancy is high, with a rate of 96.2% as of the end of Q2. EQR stands to gain as interest rates move lower over time, cutting its borrowing costs. The company is also strategically culling older buildings from its portfolio and using the proceeds to snap up newer ones.

In New York City, SL Green Realty (SLG) has interests in 53 buildings, totaling around 31 million square feet. SLG has been cutting long-term debt, from about $5.5 billion five years ago to around $3.7 billion today. SLG's office visits are only 5.3% below 2019 levels, according to Placer's June numbers, a sign of a cautious but steady return to office work.

As cities like Boston, New York, and San Francisco prepare for commuters to return to the office four or more days a week, office landlords must continue to adapt and innovate to meet the changing needs of their tenants. The future likely involves a transformed office landscape with more hybrid work, selective return to offices, and repurposing of surplus space rather than a full return to pre-pandemic conditions.

[1] Office vacancies remain high despite signs of recovery [2] EQR sells off older properties, buys in Atlanta [3] San Francisco office vacancy rate hits 34.8% [4] Tech-heavy regions see office sales activity [5] Interest rates remain elevated, lending environment cautious for office properties

1. The high vacancy rates in office spaces, despite signs of recovery, may present challenges for traditional real estate investment trusts (REITs) focused on office buildings, advocating for a shift towards investing in high-yield stocks or dividend growth stocks.
2. As tech-heavy regions witness office sales activity, apartment REITs such as Equity Residential (EQR) might capitalize on the opportunity by expanding their portfolio in cities like Atlanta, focusing on markets with potential repositioning opportunities and strong tenant demand.

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