U.S. Office Market Rocked by Trump Administration Policies

The US office real estate market has been on a tumultuous journey over the past few years, with a fragile recovery finally taking shape in late 2024. After four challenging years, the market reached an inflection point due to increased leasing activity and a significant reduction in renewals.

However, the recovery has been facing headwinds due to the policies of the current US President, Donald Trump. His trade policies, which included substantial tariffs, have caused uncertainty and affected investment decisions in real estate. This uncertainty has been causing instability in the equity and bond markets, leading to interest rate cuts being pushed back.

The lack of clarity on trade policy is hurting the US economy, and growth forecasts are being downgraded as a result. The tariff-induced instability has had an outsized impact on the Washington DC area, including Southern Maryland and North Virginia.

Despite these challenges, there have been signs of progress. The return of some equity to the sector was observed in 2024, especially in the debt capital markets. The Department of Government Efficiency (DOGE) also announced plans to terminate over 679 office leases and divest from 400 properties.

The inclusion of high-quality office transactions with stronger cash flow was a sign of progress in conduit markets. Certain sub-markets also saw positive trends, with almost half turning positive in net absorption in Q4 2024.

However, net absorption in Q1 2025 returned to negative, indicating a potential slowdown in the recovery. Despite this setback, the market approached the bottom and was on a path to recovery by the end of 2024, with increased net absorption and decreased availability over three consecutive quarters.

SASBs for office assets also returned to the market with approximately US$10bn of issuances in Q1 2025, after a complete absence in 2023. The recovery in the office real estate market is set to continue disparately across regions, with Miami, Nashville, and Boston identified as top cities for office investment due to their low vacancy rates, positive net absorption, and other strong indicators.

The office real estate market was one of the sectors hardest hit by COVID-19 shutdowns in 2020 and decreased levels of office attendance that followed. As the world adapts to the new normal, the market is being tested by the Trump administration's trade, immigration, and fiscal policies.

Historic discounts are being observed on once sought-after properties, including 285 Madison Ave in New York. Discounts are more pronounced outside prime markets, with some properties seeing significant reductions in value.

Recently, a group of experts, including Precilla Torres, Christopher Hodge, Thibaut Cuilliere, Thierry Cherel, and Romeo Yombo, examined the uneven recovery seen in the US office real estate market in a webinar. They discussed the challenges facing the market and the potential for continued recovery in the coming years.

As the market continues to evolve, it will be interesting to see how it navigates the challenges posed by the Trump administration's policies and adapts to the changing landscape of the post-COVID world.