Investing in Commercial Real Estate: Office Properties in 2025—What You Need to Know

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The Office Market is Shifting—Are You Ready?
Did you know that vacancy rates in large office buildings have soared as high as 28.6% in major tech hubs like San Francisco, while smaller office properties in suburban areas are thriving with vacancy rates well below the national average? This striking contrast highlights a pivotal moment for investors in commercial real estate. As businesses continue to downsize and hybrid work models reshape the demand for office space, understanding where the opportunities—and risks—lie has never been more critical.

In this newsletter, we’ll dive into the latest trends in office property investments, exploring the returns, risks, and potential of both large and small office buildings. Whether you’re a seasoned investor or new to the market, this analysis will equip you with the insights you need to navigate the evolving landscape of commercial real estate in 2025.

Key Insights: Large vs. Small Office Properties

The office sector is undergoing a transformation, and not all properties are created equal. Here’s what the data reveals:

• Large Office Buildings (200,000+ sq ft):
  These properties, particularly in urban tech markets like San Francisco and Seattle, are facing significant challenges. Vacancy rates have surged—28.6% in San Francisco and 27.5% in Seattle—driven by businesses downsizing and adopting remote work policies. Additionally, nearly $500 billion in U.S. loans are set to mature in 2025, with 14% of these loans potentially underwater, creating refinancing risks for investors. Distress transactions for large properties have increased, with urban deals nearly doubling in 2024.

• Small or Multitenant Office Properties (<200,000 sq ft):
  In contrast, smaller office buildings, especially in suburban markets like Chicago and the Twin Cities, are showing resilience. Vacancy rates in these areas are below the national average of 19.9%, with Chicago at 19% and the Twin Cities at 16.5%. Sales volumes have grown significantly, with the Twin Cities seeing a jump from $11 million to $194 million in Q1 2025. These properties benefit from a diversified tenant base, reducing the risk of income loss from a single tenant default.

Returns: Where’s the Stability?

Returns in the office sector vary widely depending on property size and location:

• Large Office Buildings:
  Investors in large properties are facing pressure from high vacancies and refinancing challenges. Valuation growth has been modest, with only 15% growth on average across the 20 largest U.S. metro areas since Q1 2019. The outlook remains cautious, with 60% of investors expecting revenue growth, but offices are not among the top opportunities.

• Small or Multitenant Properties:
  These properties offer more stable returns, driven by consistent demand from small businesses and startups. Markets like the Twin Cities have seen strong sales growth, and the flexibility of short-term leases and scalable layouts provides income stability. With the global office space market projected to grow from $3.26 trillion in 2025 to $4.20 trillion by 2030, smaller, adaptable spaces are well-positioned for long-term success.

Risks: What to Watch Out For

Understanding the risks is essential for making informed investment decisions:

• Large Office Buildings:
  The primary risks include high vacancy rates, loan maturity issues, and the ongoing impact of hybrid work models. With interest rates expected to settle at 4.5% by the end of 2025, refinancing large loans could be costly. Additionally, underutilized space in large buildings may require significant investment to convert or upgrade, adding to the financial strain.

• Small or Multitenant Properties:
  While these properties are generally safer, they are not without risks. Economic downturns could impact small businesses, leading to higher tenant turnover. However, the diversified income streams and lower exposure to large tenant defaults make these investments more resilient.

Opportunities: Where to Invest in 2025

Despite the challenges, the office market is entering a "buy" cycle, with 68% of investors expecting improved fundamentals. Here’s where the potential lies:

• Large Office Buildings:
  Opportunities exist for value-add strategies, such as sustainability upgrades or conversions to residential use, particularly in areas with housing shortages. Sustainability is a key driver, with 76% of investors planning deep energy retrofits to meet regulatory standards and attract tenants.

• Small or Multitenant Properties:
  The real potential is in smaller, flexible office spaces, especially in suburban and secondary markets. Demand for satellite offices and on-demand workspaces is growing, driven by hybrid work trends. North America, in particular, is the fastest-growing region for flexible office solutions, making it a prime area for investment.

Conclusion: Navigating the Office Market with Confidence

The office property market in 2025 is a tale of two segments: large buildings facing headwinds and small properties offering stability and growth. For investors, the key is to focus on properties that align with evolving tenant needs—flexibility, sustainability, and location.

If you’re considering an investment in commercial real estate, now is the time to act, but it’s crucial to have the right guidance. As a licensed commercial real estate broker with deep expertise in the market, I can help you find and evaluate the perfect property to meet your investment goals. Whether you’re looking for a small, multitenant building with steady returns or exploring value-add opportunities in larger properties, I’m here to assist.

Contact me today to discuss your investment strategy and discover the best opportunities in the market. Let’s work together to secure your next successful investment.

Contact me directly at [email protected].

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