Office CRE 101

Office real estate encompasses buildings—or portions of buildings—leased to tenants for administrative, professional, or knowledge-work purposes. The sector is broadly categorized by class (A, B, C), location (CBD, suburban, flex), and building type (multi-tenant, single-tenant, medical office).

Class A office refers to the top tier: newer construction or fully renovated buildings in prime locations with high-end finishes, full-service amenities, and above-market rents. Class B is functional but not premier—older buildings in acceptable condition, typically trading at lower rents and occupied by a mix of professional services tenants. Class C is the lowest tier: older buildings with outdated systems and limited amenity value.

Medical office is a distinct subcategory that has significantly outperformed traditional office since 2020. Healthcare is not remote-workable, creating structural demand differences. Medical office buildings (MOBs) often trade at tighter cap rates than comparable general office because of their occupancy durability.

Office leases are typically longer-term than retail (5–10 years is common), structured as full-service gross, modified gross, or net leases. The structure affects both the tenant's budgeting and the landlord's ability to control operating expense recovery.

Office underwriting in 2024 requires an honest assessment of remote and hybrid work's impact on a specific building's tenant base. National statistics are less useful than knowing what the specific tenants in a specific building are actually doing with their space.

Lease roll is the primary risk factor in office investment. A building with 60% of leases expiring in the next 24 months in a market with elevated vacancy carries substantial re-leasing risk. Lenders are acutely aware of this—many have tightened financing on office with near-term lease roll.

Operating expense analysis for office is more complex than retail or multifamily. Janitorial, utilities, and building management costs are substantial in full-service buildings. Cap ex for elevator modernization, HVAC replacement, and common area renovation must be budgeted realistically.

Treating office as a stable income investment without accounting for lease roll risk is the most costly mistake in the current environment. A building at 95% occupancy with 70% of leases expiring in 18 months is not a stable asset—it's a lease-up play priced as a core holding.

Underestimating the cost to retain or replace tenants is consistently a problem. TI packages, free rent, and broker commissions can total $75–$150/SF or more in competitive markets. Budget realistically.

Buyers sometimes fail to distinguish between CBD and suburban office market dynamics. These are effectively different product types with different demand drivers, tenant profiles, and vacancy trajectories.

National office vacancy reached record highs in 2024—CBRE reported overall U.S. availability approaching 22% by year-end. Suburban markets generally outperformed CBD product, with suburban vacancy running 300–500 basis points below CBD levels in most metros.

Indiana and Kentucky office markets reflect this pattern. Indianapolis suburban office maintained stronger occupancy than the central business district, where several large tenants downsized or consolidated. Louisville showed a similar bifurcation. Medical office in both states remained a strong performer with near-full occupancy in most submarkets.

Transaction volume in office dropped more than any other commercial property type from 2021 to 2024. Lender caution—particularly from regional banks carrying existing office exposure—has constrained deal activity. Buyers who can identify well-located suburban office with strong tenant credit and long lease term, financed conservatively, can still find compelling risk-adjusted opportunities.

Office brokerage is highly relationship-driven, particularly at the tenant representation level. Corporate tenants rely on tenant rep brokers to run site selection processes across multiple buildings, negotiate LOIs, and advise on lease structures. This is specialized work that differs from investment sales brokerage.

For investment transactions, a broker who understands the local leasing market is more valuable than one who only tracks cap rates. The ability to assess whether vacant space will lease—and at what economics—is the core underwriting question in office.