Leasing stabilization, constrained capital: The uneven office reset

Office market fundamentals appear to be stabilizing, as vacancy rates have begun to level off and leasing activity for higher-quality buildings has improved. However, this operational stabilization is occurring alongside financial stress for many property owners, driven by large volumes of upcoming loan maturities, refinancing challenges and negative equity positions. 

As a result, asset-level recovery and financial recovery are no longer aligned. Owners with access to capital are funding tenant improvements, amenity upgrades and repositioning efforts that support occupancy gains. In contrast, capital constraints are limiting other owners from reinvesting or adapting to current tenant demand.

This disparity is widening the gap between outcomes: Some assets are stabilizing, others are converting to alternative uses, and many remain constrained despite improving market averages.

For owners and investors, understanding leasing trends and capital constraints is critical to evaluating risk, timing and long-term asset strategy. Market averages no longer capture the full picture of performance, as asset-level outcomes are increasingly shaped by financing structures and access to capital, not just tenant demand.

Operational stabilization in select markets

To start with some good news: Market-level fundamentals are no longer deteriorating at the pace seen earlier in the cycle. 

National office vacancy rates began to decelerate in mid-2024. They peaked in Q2 2025 at 14.2% and have since declined modestly. Vacancies remain elevated but are no longer rising materially quarter over quarter. 

At the same time, leasing demand has grown increasingly concentrated in higher-quality properties. Class A buildings carry higher vacancy rates than Classes B and C, a function of recent supply dynamics rather than weaker demand, yet Class A space is posting positive net absorption after several years of sustained tenant losses, while Classes B and C properties remain in negative territory. The divergence reflects tenant consolidation and flight-to-quality relocations rather than broad-based expansion of office footprints.

Stabilization is being supported by a sharp contraction in new supply, as development activity remains muted. New office development remains historically low, with only 19.8 million square feet of construction starts in 2025 compared to 97.1 million square feet added in 2019 (prepandemic)—a decline of almost 80%. The market is therefore adjusting through limited additions to inventory rather than through broad-based growth in tenant demand. 

Taken together, the data suggests the office market is stabilizing in certain segments, but the recovery is selective and asset-specific rather than market-wide. While operating fundamentals are stabilizing in parts of the market, financial recovery is not keeping pace .

Leasing improvement alone does not unlock redevelopment

Even as leasing fundamentals began to stabilize in 2025, the refinancing cycle was still unfolding. Many owners continued to face significant financial constraints that limit reinvestment. Valuation declines and higher borrowing costs have materially changed refinancing economics, often requiring owners to contribute additional equity to extend or replace existing loans.

Nearly 30% of office loans maturing in 2025—roughly $30 billion—were estimated to be in negative equity positions, according to the International Monetary Fund’s Global Financial Stability Report.  

Approximately $230 billion in office-backed mortgages matured in 2025, with roughly $100 billion per year scheduled through 2027, according to the Mortgage Bankers Association. Much of this debt originated in a lower-rate, higher-valuation environment, making refinancing more difficult even for assets showing leasing improvement.

Refinancing conditions remain tight and uneven for the office sector. In 2024, just 32% of commercial mortgage-backed securities (CMBS) loans backed by office properties were successfully refinanced, compared to about 85% for industrial, multifamily and retail loans. 

Some lenders have relied on extensions to delay resolution. Global real estate services firm Colliers estimated that approximately $384 billion of commercial real estate loans scheduled to mature in 2024 or sooner were extended into 2025, representing more than one-third of construction and real estate maturities last year. In many cases, resolution was delayed rather than achieved, and the pressure continues to weigh on the sector’s financing.

As a result, physical stabilization does not necessarily translate into redevelopment flexibility. Capital is often directed toward balance sheet repair rather than building upgrades, repositioning efforts or conversion initiatives, delaying improvements that boost longer-term competitiveness.

Asset-level outcomes depend on capital feasibility

The difference between operating improvement and financial capacity is increasingly shaping what happens at the property level. Leasing improvement alone is no longer enough.

Office properties that can refinance, absorb higher borrowing costs and attract incremental capital are able to reinvest and reposition. Others, even with modest leasing gains, remain constrained by balance sheet limitations.

That distinction is visible in conversion activity. According to CBRE, more than 23.3 million square feet of U.S. office space was slated for conversion or demolition in 2025, exceeding the roughly 12.7 million square feet of new office construction delivered that year. An additional 81 million square feet remains in the conversion pipeline.

These projects are not happening uniformly across the construction and real estate industry. They are moving forward where ownership structures can support a pricing reset and where new capital can be raised to make the economics work.

Some buildings are being recapitalized, repositioned or converted to new uses. Others are effectively stalled: extended, partially leased or lacking the capital to reposition. In many cases, outcomes now hinge less on whether a building can attract tenants and more on whether the capital stack can be made viable.

Owners looking to position assets for recovery should consider taking an active approach to capital strategy. That includes evaluating refinancing options well ahead of maturities, pursuing creative recapitalization structures and planning phased reinvestment—all of which can help preserve optionality. Even modest improvements in amenities or efficiency can support leasing traction if timed with a sound financing plan.

Capital pressures shape the next phase of the office market

Leasing conditions are beginning to stabilize in parts of the office market, but financial recovery is proving more uneven. The maturity wave has not fully worked its way through the system, and lenders remain cautious. As a result, access to capital continues to determine which properties can be repositioned or converted and which remain constrained.

This dynamic may be felt most acutely in the middle market. Many owners rely on regional bank relationships and do not have the same flexibility to raise fresh equity or restructure capital as larger institutional sponsors. For these owners, refinancing often defines what is realistically possible for the asset over the next several years.

As a result, recovery is unlikely to unfold evenly. Some buildings will move forward through recapitalization and reinvestment. Others will remain extended, partially leased and limited by their capital structure.

For owners and investors, the key question is no longer just where leasing is improving, but where financing and reinvestment can realistically be supported. Stabilization in operations does not automatically create financial flexibility, and that distinction will matter in the next phase of the cycle.