The Quiet Comeback: Why Office Real Estate Is Poised for a Post-Rate-Cut Revival

Research Report | October 2025

Axum Group of Companies - Investment Research Division

After three years of relentless doom-and-gloom headlines about empty towers and collapsing valuations, something unexpected is happening in North America's office market: signs of genuine recovery. Interest rates are falling, hybrid work patterns have stabilized, and tenants—from tech giants to financial institutions—are signing long-term leases again. The bloodied office sector, once written off as obsolete, is quietly demonstrating that reports of its demise were greatly exaggerated.

From Crisis to Inflection: The U.S. Market Turns

Barron's reports that Boston Properties Inc. (BXP), the largest publicly traded office real estate investment trust in the United States, is experiencing a measurable turnaround in coastal markets including New York, Boston, and San Francisco. After years of underperformance, occupancy and rental inquiries in high-end, transit-accessible buildings are rebounding strongly.​

JPMorgan upgraded BXP to "Overweight" in mid-October with an $83 price target, citing accelerated leasing momentum throughout 2025. The company has signed 1.1 million square feet across 91 lease agreements, with a strong presence of blue-chip tenants like Microsoft, Google, and Wellington Management—firms now returning employees to the office more consistently than pandemic-era forecasts predicted.​

Jim Cramer singled out BXP as one of the "cheapest quality names left in the S&P 500," highlighting its dividend resilience and discounted valuation relative to net asset value. When a property operator of BXP's caliber attracts such bullish attention from Wall Street analysts and market commentators alike, investors should pay attention.​

The broader U.S. office market is showing similar stabilization. CBRE projects the office market will reach a "pivotal shift" in 2025, with occupier sentiment transitioning from contraction to stabilization and even expansion. Office attendance has reached 80% of pre-pandemic levels as of July 2025, and gross leasing volume grew 6.5% quarter-over-quarter to 52.4 million square feet—just shy of a post-pandemic record.​

Perhaps most tellingly, U.S. office vacancy rates have begun declining for the first time since early 2019. JLL reports that 18 markets are now exceeding pre-pandemic leasing activity over the past year, with seven additional markets returning to over 90% of pre-pandemic levels.​

Rate Cuts: The Catalyst Powering the Recovery

After a brutal tightening cycle that saw the Federal Reserve push rates to 5.5%, both the U.S. Federal Reserve and Bank of Canada have pivoted dovish, with multiple rate cuts materializing through 2025. This monetary policy shift is breathing life back into debt-heavy sectors like real estate—particularly office REITs reliant on long-term refinancing.​

J.P. Morgan Research projects that REITs could deliver approximately 10% total returns in 2025, combining 4% dividend yields with low-to-mid-single-digit funds from operations (FFO) growth and valuation expansion. The firm expects bottom-line FFO growth of 3% for REITs in 2025, accelerating to nearly 6% in 2026 as transaction activity improves and REITs drive external growth.​

Investment volumes in Canada's commercial real estate market are rebounding sharply, rising from approximately $45 billion in 2024 to nearly $48 billion projected for 2025, according to CBRE's national outlook. As yields compress and liquidity normalizes, institutional capital is flowing back to "core" properties in prime locations rather than speculative development deals.​

The interest rate environment particularly benefits office REITs because of their sensitivity to borrowing costs. Historically, office REIT performance has doubled market averages during early rate-cut cycles as refinancing pressures ease and property valuations stabilize.​

The Flight to Quality: Trophy Buildings Win Big

Not all office properties are created equal, and the pandemic has dramatically accelerated a "flight to quality" that's reshaping the entire sector. While overall U.S. office vacancy hit a record 19.6% in Q1 2025, that headline number masks a profound divergence.​

Class A office stock built since 2000 has seen vacancy decline by 104 basis points over the past 12 months, tightening well in advance of the broader market. Trophy assets—the newest, most amenity-rich buildings in the best locations—have posted three consecutive quarters of declining vacancy.​

In Canada, downtown Class A vacancy declined 90 basis points in Q3 2025, the largest quarterly improvement since 2008, settling at 16.1%. Trophy and best-in-class properties command the highest rental rates, and tenants are demonstrating willingness to pay premium prices for quality product.​

Green Street estimates that while Class B/B+ office properties have experienced 30% real net effective rent declines since 2019, trophy and Class A assets may achieve positive real net effective rent growth by 2026. This bifurcation creates a clear winner-takes-most dynamic where prime properties are leasing quickly while older buildings struggle.​

The REIT sector reflects this quality advantage. Office REITs—which typically own higher-quality properties in central business districts—reported an average occupancy rate of 86.3% in Q3 2024, significantly outperforming the private market average of 81.5%. Despite broader property fundamental challenges, publicly listed equity office REITs ranked fourth in total return performance among 13 REIT sectors in 2024, realizing a 21.5% total return.​

Canada's Recovery: Toronto Leads, Others Follow

The Canadian office market is experiencing a similarly uneven but encouraging recovery. Toronto posted one of its best quarters in years during Q3 2025, with downtown vacancy dropping 150 basis points to 17% thanks to 1.5 million square feet of positive net absorption. Citywide, Toronto's vacancy rate for all classes dipped 90 basis points to 18.9%.​

National office availability rates have declined 160 basis points year-over-year to 16.4%, driven by increased demand for Class AAA office space, a significant reduction in new construction, and the re-occupancy of previously subleased spaces. Sublease availability has fallen to 13.9% in Q3 2025, down 27.8% from its peak in Q2 2023, supported by return-to-office mandates from major employers including Canadian banks and the Ontario government.​

Calgary presents a particularly compelling turnaround story. Despite having the highest availability rate at 20.5%, the city saw a remarkable 280 basis point decrease year-over-year—the strongest recovery momentum in Canada. The city's Downtown Development Incentive Program, which incentivizes conversion of underutilized office space into residential and mixed-use projects, has proven successful in reducing available inventory and rebalancing the market.​

Vancouver's office market continues to perform well with an 11.5% vacancy rate holding steady quarter-over-quarter. The city benefits from robust economic fundamentals, diverse industries, and dwindling Class A supply that provides a stronger foundation for stability than many other Canadian markets.​

CBRE Canada chairman Paul Morassutti captured the sentiment: "The Toronto office market has kicked into a new gear and we would expect other Canadian cities to start trending in this direction". The combination of no new space coming to market and tightening return-to-office mandates from major employers has created steady demand for premium properties.​

Return-to-Office Mandates: The Demand Driver

A critical catalyst underpinning the office recovery is the wave of return-to-office mandates sweeping corporate North America. The number of workers required to be in the office regularly surged to 75% in late 2024, up from 63% in early 2023, according to Pew Research Center.​

Amazon announced that starting January 2025, all employees would be required to work five days a week in the office—a dramatic shift from its previous three-day hybrid policy. Ontario's provincial government mandated that all public service employees return to the office four days per week starting October 2025, ramping up to five days per week by early January 2026.​

Four of Canada's "Big Five" banks—BMO, Scotiabank, RBC, and TD Bank—all announced return-to-office policies commencing in the second half of 2025 requiring employees in the office at least four days per week. These mandates directly translate to space demand: office mandates issued in Q3 2025 alone affected roughly 250,000 workers in the U.S., with other companies likely to follow suit.​

Kastle Systems data shows national office occupancy rates in major U.S. cities have stabilized between 51% and 54%, with Houston and Dallas consistently topping 60%. Unlike 2024's week-to-week volatility, 2025 points to a more stable return-to-office pattern, suggesting hybrid work has reached a new equilibrium.​

Supply Constraints: The Hidden Tailwind

Perhaps the most underappreciated factor supporting the office recovery is the dramatic collapse in new supply. The U.S. construction pipeline has fallen to less than 6 million square feet—down from over 50 million square feet in 2019. On average, major office markets have less than 500,000 square feet under construction, with some speculative trophy products being proposed in high-cost gateway markets doing little to offset broader declines.​

Canada's story is even more dramatic. The national office construction pipeline has fallen 80% from its 2020 peak, with only 2.6 million square feet under construction as of Q3 2025. Canada is on track to deliver just 2.2 million square feet of new supply in 2025—the lowest annual total since 2019. No new construction projects have commenced in over one year, and it's been two years since any projects larger than 100,000 square feet kicked off.​

This supply drought creates a powerful tailwind for existing quality properties. As CBRE notes, "Given the recent rebound and levels of demand for premium office product, some shelved projects could become viable once again". However, even if new projects start today, they wouldn't deliver for several years, creating a medium-term supply squeeze that should support rental growth and occupancy for top-tier buildings.​

Investment Opportunities: Contrarian Value Emerges

The combination of improving fundamentals and depressed valuations creates compelling entry points for selective investors. Barron's featured nine promising REIT opportunities in early 2025, noting that valuation spreads across the real estate sector remain at decade-wide extremes.​

Office REITs like BXP, with premium assets and long leases, are expected to lead total return rankings as rates stabilize and economic uncertainty retreats. BXP currently offers a 3.7% dividend yield after a dividend reset, providing income while investors wait for FFO growth to accelerate in 2026-2027.​

Canadian office REITs present even more dramatic discount opportunities. Many trade 25–35% below net asset value—substantial discounts to private market valuations—making them contrarian long-term plays. Diversified and office REITs delivered 15% returns in the trailing 12 months, outperforming retail (9%) and industrial (-3%) sectors.​

The Canadian REIT market has provided a safe haven in 2025 with a total return of +10.5% year-to-date, demonstrating resilience even amid broader market volatility. As one industry expert noted, "The consensus is that the Canadian REITs market is incredibly dynamic and flexible. Investors are attracted by the benefits of the REIT structure, including stable income streams and inflation protection".​

Risks Remain, But Balance Is Shifting

Despite these encouraging signs, meaningful risks persist. Remote work has permanently elevated from 5% of employees working entirely from home in 2019 to 13% currently, with nearly 28% of all workdays remote. This structural shift continues to weigh on overall office demand, particularly for older, poorly located buildings.​

Approximately 30% of U.S. office buildings analyzed by Gensler are suitable candidates for office-to-residential conversions. While this represents an opportunity to remove obsolete inventory, it also signals that significant portions of existing stock may never return to economic viability as office space.​

Economic uncertainty remains elevated. Concerns about tariffs, recession risks, and continued challenges in the banking sector could disrupt the nascent recovery. Leasing volumes are still more than 20% below 2019 levels nationally, and sublease space, while declining, remains elevated relative to historical norms.​

The Bottom Line: Selective Recovery, Real Opportunity

The office market is not experiencing a broad-based comeback—it's undergoing a fundamental restructuring where winners and losers are being permanently separated. Trophy buildings in transit-rich urban cores with top-tier amenities are thriving. Class B and C properties in secondary locations face continued pressure and potential obsolescence.

For investors willing to be selective, this creates opportunity. Quality office REITs trading at depressed valuations, benefiting from falling interest rates, signing long-term leases with blue-chip tenants, and operating in supply-constrained markets represent a compelling risk-reward proposition.

The consensus that "office is dead" has created the conditions for contrarian investors to capitalize on a sector quietly stabilizing. As occupancy improves, supply constraints tighten, and rate cuts provide valuation tailwinds, office REITs—once left for dead—may deliver some of the market's most surprising returns over the next several years.

The question isn't whether office real estate will recover. It's whether investors will recognize the inflection point before the opportunity passes.

About Axum Holdings

Disclaimer: This content is for informational purposes and is not investment advice. Past performance does not guarantee future results. All investing involves risk. Consult a professional before making major investment decisions.

About Axum Holdings: Founded in 2012, Axum is a private investment holding company focused on steady cash flow and long-term value through diversified holdings.