MBA NewsLink Q&A: JLL’s Adam Dembowitz Discusses the Office Sector

MBA NewsLink interviewed Adam Dembowitz, Senior Managing Director in JLL’s Value and Risk Advisory team, about his views on the office sector.

MBA NewsLink: What is the overall sentiment in the office market at the moment?

Adam Dembowitz

Adam Dembowitz, JLL: Office is still very much in flux as an asset class nationwide, but we may be near or at the bottom of the cycle.

We’ve seen significant value swings in recent years due to post-COVID impacts, notably, hybrid/remote/work-from-home models, changes to federal monetary policy, and the resultant impacts those have had on the size, type, and location of office space the market wants.

We’ve also seen a continuing flight to quality trend; coupled with a glut of older, less functional office space, there’s been a significant shift in office investment appetite in recent years. While investors, owners, lenders, developers, and occupiers are still waiting to see if we’ve reached bottom and are remaining cautious, we are seeing significant signals that participants are engaging in transactions for the second quarter and beyond in 2024. For those willing to be bold, this is a generational opportunity to invest in office assets.

NewsLink: Are you seeing any green shoots within the sector?

Dembowitz: Absolutely, on a macro level, we’re seeing a growing preference for modern buildings–those delivered within the last 10 years–and return-to-work decisions by major occupiers.

While we previously hoped for multiple rate cuts in 2024, that sentiment has cooled as inflation has remained persistently higher. With an undersupply of trophy-class assets in many metros and over $100 billion in office loans maturing this year and next, there’s a lot of activity.

Now, four years after the start of the pandemic, we’re seeing real shifts back to the dynamic, in-place work environment across many industries. Our research team found that active office space requirements are up roughly 20% year-over-year.

NewsLink: What do you anticipate the prevailing trends will be impacting the national office outlook for 2024?

Dembowitz: The bifurcation of the market will continue to play out, particularly as we head toward the inevitable end of the “kick the can” approach on loan maturities.

The top half of the office market, which is product delivered generally in the last 10 years with amenities that are in-demand with tenants, will continue to outperform. Part of this is driven in part by the low projected new construction deliveries, due to the cost of capital.

In addition to the bifurcation taking place, we’re also going to see hundreds of billions of maturing office loans, providing a great opportunity for opportunistic capital.

NewsLink: What’s your outlook for the rest of 2024?

Dembowitz: We thought we were past the inflation fears of 2022 and 2023, though clearly some inflation risk and market uncertainty remain, as ever. As we approach the summer, we are seeing signs of market confidence improving globally and expect to see transaction volume moving upward through the next several months.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)