Callahan Capital Partners Commercial Office Digest

Callahan Capital Partners is a real estate private equity firm and operator focused exclusively on the origination, acquisition and management of high quality office assets in select urban markets throughout the United States.

“Investors who shunned the beleaguered U.S. office market in recent years are coming back, brightening the outlook for the sector after five years of turmoil.”

2024 office asset sales were up 20% after a very weak 2023, and the increase in sales is expected to continue in 2025. Opportunistic real-estate funds are sitting on plenty of cash with $196.8 billion available at the end of last year, up from $179.9 billion at the end of 2020 (source: Prequin). Investors are now seeing opportunities buying premium quality assets facing debt issues (a strategy we believe in at Callahan), or picking up empty assets for pennies on the dollar (a strategy we are more wary of). Read more from the WSJ here.

“At the current growth rate of nine percentage points per year, the VODI [VTS’s Office Demand Index] would reach 100 by December 2028, marking a full return to the pre-pandemic average for new office demand from 2018-2019.”

VTS’s Office Demand Index (VODI) shows a gradual recovery of office demand that continued through the end of 2024. Thus far, New York City is the only market to have seen at least a month of full recovery to pre COVID new office demand, but there are many markets showing YOY recovery growth aside from New York City, such as San Francisco, Chicago, and Seattle. See the January 2025 VODI report for more insights here.

“I wouldn't expect the 10-year to have any big move down to where we were at before Covid or even at the beginning stages of Covid. We're living in a new reality.”

Drastically lower interest rates for commercial real estate are not likely in 2025, which is a troubling thought for developers and landlords who have pushed out loan terms of put off refinancing, expecting a better lending environment to emerge. “Extend and pretend” has pushed more loan maturities into 2025, putting CMBS maturities peaking at $5.4B in October 2025. Read more on Bisnow.

Charts We Are Talking About

Prime office vacancy rates remained significantly lower in most markets than the overall market vacancy, continuing to stress the flight to quality. In markets with newer speculatively built supply, like Nashville, Seattle and Raleigh Durham, vacancy rates for prime assets are higher until lease up occurs. As premium space becomes increasingly scarce in tighter markets, demand is likely to start hitting next quality tier assets. See CBRE’s Q4 Office Report Here.

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