The North American commercial office market entered a structural correction beginning in 2022 as rising interest rates compressed property values and sharply increased the cost of debt. The correction reflects both cyclical rate dynamics and a durable shift in occupancy patterns following the widespread adoption of hybrid and remote work arrangements. By early 2024, brokerage data indicated that pricing had stabilised in several major markets and transaction activity was beginning to recover, though the path to equilibrium varies substantially by submarket, asset quality, and remaining lease term profile.

Scale of the correction

The magnitude of the repricing has been substantial. Major transactions completed during 2023 and into 2024 demonstrated discount rates of 40–45% relative to prior-cycle peak values. Jones Lang LaSalle estimated that property owners with loans maturing through the end of 2025 would require between $270 billion and $570 billion in new equity to address the gap between maturing debt and asset values that had declined materially from origination. Of the approximately $3.1 trillion in global commercial real estate with maturing debt through 2025, more than three-quarters was concentrated in the United States, disproportionately in the residential and office sectors.

Dry powder accumulation

While distress has been significant, institutional capital has been accumulating on the sidelines in anticipation of the repricing cycle. JLL reported approximately $402 billion of uninvested capital designated for commercial real estate as of late 2023. The presence of substantial dry powder against a backdrop of motivated sellers — particularly those facing debt maturity without refinancing capacity — created conditions for opportunistic acquisition by well-capitalised buyers.

The early market recovery was characterised by first-mover advantages for capital that could underwrite quickly and close without financing contingencies. Properties previously associated with single large-footprint tenants have attracted interest from buyers repositioning the asset for multi-tenant use or residential conversion.

Transaction signals

Early indicators of market recovery included rising bid-per-deal ratios, measured at a 16% increase by November 2023 relative to year-end 2022 (JLL data), and growing tour volumes for marketed properties. Green Street's commercial property price index registered flat price movement in December 2023 — the first stabilisation signal after sustained monthly declines. The pricing relationship between commercial real estate yields and corporate bond yields was assessed by Green Street as having returned to fair value by January 2024.

Floor plate and configuration trends

The correction has also accelerated a structural shift in the configuration demand for office space. Research from Canadian markets documents a sustained increase in demand for smaller tenant suites — spaces under 5,000 square feet — in contrast to the large contiguous blocks that dominated pre-2015 leasing activity. Calgary's downtown office market, which experienced vacancy rising to approximately 25% following the 2014 oil price decline, documented this trend directly: demand from smaller tenants was growing noticeably while large block space (100,000 square feet or more available as one contiguous unit) accounted for 26% of available inventory with limited uptake.

Buildings designed around 15,000-to-17,000-square-foot floor plates — smaller than the 20,000-to-26,000-square-foot plates that characterised construction from 2000 to 2015 — are better suited to multi-tenant reconfiguration and have shown greater leasing velocity in markets where smaller tenant demand predominates.

Asset quality divergence

The correction has accelerated divergence between asset quality tiers. Well-located, well-amenitised buildings with efficient floor plates and strong environmental credentials have maintained higher occupancy and commanded rental rates closer to pre-correction levels. Older, less efficient buildings in secondary locations — characterised as "stranded assets" in Morgan Stanley research — face structural impairment and may require conversion or demolition to achieve productive use.

This quality divergence reinforces the thesis that new development designed around current tenant requirements — smaller, more flexible floor plates, co-tenant density that supports building amenities, suburban professional demand centres rather than central business district exposure — benefits from the demand shift rather than being impaired by it.

Sources

Research in this article draws on: Jones Lang LaSalle global commercial real estate analysis (2024); Green Street commercial property price index commentary (January 2024); CBRE and Avison Young Calgary office market reports; Morgan Stanley commercial real estate research.

See also

• commercial-real-estate-cycles — the broader cycle framework within which this correction sits
• capitalization-rate — the cap rate mechanics through which interest rate changes translated into price corrections
• interest-rate-transmission — the four channels by which rate changes affected commercial property values