Lenders are viewing the sector with cautious optimism as demand for higher-quality office space grows
After slumping during the COVID-19 pandemic, the US office market hasn’t exactly roared back into life – but there are signs that lender appetite is slowly returning to the sector.
Demand for office space is beginning to stabilize as employers quietly ramp up return-to-office efforts, and a recent Cushman & Wakefield study showed that while quarterly absorption remained negative in the second quarter of this year, the four-quarter rolling average is improving.
That’s reason to believe “the tide is beginning to turn,” the commercial real estate giant said, with the past four quarters seeing 35 markets register positive absorption.
Lenders flocked away from the office market when stay-at-home instructions and public health restrictions arrived in 2020, heralding a remote-work revolution that saw office vacancy rates soar across major cities.
But PeachTree Group is among the commercial lenders for whom the office side is “starting to become interesting,” according to its chief executive officer and managing principal Greg Friedman (pictured top).
He told Mortgage Professional America that while lenders were still treading cautiously on the office market, its prospects appear to be steadily improving.
“Office has become a little bit more compelling, especially when you look at the spreads that you’re able to get lending on the office side,” he said. That’s partly because higher debt yields are now on offer, allowing lenders to drive better returns.
“We feel like the office side’s starting to show some signs of being priced dramatically to the favour of the lender,” he said. “And so we’re starting to lean into the office side.”
Lenders, investors taking a nuanced look at the office market
The sector as a whole saw a stream of negative headlines because of plunging demand after 2020, but the deep divisions in the office market have become increasingly clear.
Put simply: quality of space is all-important, according to Cushman & Wakefield. Its report showed that Class A office stock, the highest quality of buildings on offer, saw increased demand in more than half of all markets across the country in the second quarter.
“The persistent trend of strong occupier demand for high-quality space, coupled with a dwindling supply, is likely to continue,” it noted.
In April, BridgeInvest managing partner Alex Horn told MPA that Class A and some Class B office products are likely to see continued uptake – although a more complex outlook is continuing for other types.
“There are still a lot of challenges ahead, simply because how we use offices as a country has changed,” he said, “especially in those B and C offices.
“We need to have supply destruction in the C-class office and the B-class office, because there’s just not as much of a need for it now as we’ve had in the past.”
Friedman highlighted that the reported woes of the office market have been skewed slightly by the distress being seen in certain areas. “Ninety percent [90%] of the vacancy issues are in 30% of the buildings,” he said.
Rosier office prospects helping boost overall commercial outlook
The improving fortunes of the office market are helping paint a positive all-round picture for the commercial space, even in the face of wider economic turbulence amid the ongoing tariff war.
Friedman said a resolution to that trade chaos would inject further confidence into the commercial market – but sees plenty of reason for optimism even as the dispute rumbles on.
While a pullback on leisure travel has dampened prospects for the hotel sector, Friedman said lenders are still “bullish” on that niche – and others. “The supply-demand outlook remains very strong as an investor into the lodging space, or a lender in the hospitality space,” he said.
Odeta Kushi, Deputy Chief Economist at First American, attributes this to "ongoing affordability issues, rising material costs and tariff-related uncertainties, elevated new-home supply, and growing competition from the resale market." https://t.co/7GCI2NuOyu
— Mortgage Professional America Magazine (@MPAMagazineUS) July 18, 2025
“So we’re continuing to lean into that space as well. And multifamily continues to be very compelling for us, given that [in the] long term we still have housing issues. That creates a lot of opportunities for us as a lender as well.”
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