A global asset manager has given a $300 million boost to a prominent office landlord as a new cohort of investors shows they're willing to bet on the sector's rebound.
Hudson Pacific Properties, one of the nation's largest real estate investment trusts with a portfolio encompassing some of the hardest-hit office markets in the country, landed the capital infusion from global asset manager Cohen & Steers.
The $300 million accounts for nearly 45% of the $690 million offering the Los Angeles-based landlord recently closed and provides one of the clearest signs yet that institutional investors are setting aside any short-term economic headaches to position themselves for the office market's long-term recovery.
"We believe the West Coast office market recovery is underway and poised to gain momentum over the coming years," Cohen & Steers' Jason Yablon, an executive vice president and head of listed real estate, said in a statement.
Hudson Pacific's office holdings are concentrated in markets such as San Francisco, Silicon Valley, Los Angeles and Seattle, all of which have some of the highest vacancy rates in the country as demand for space remains below pre-pandemic levels. Tenants in San Francisco, for example, collectively handed back upward of 2.5 million square feet more than they signed on for in 2024, according to CoStar data, and the city's availability rate has climbed to a record high of about 35%.
Yet building demand and the gradual return of larger deals is fueling optimism among landlords such as Hudson, with many executives saying tenants' appetite for office space will only continue to grow.
A broadening number of investors are beginning to agree.
"Just two years ago it was difficult to find a diversified, institutional real estate investment group willing to spare a word of optimism for the United States office market," Adrian Ponsen, a senior economist with Cushman & Wakefield, told CoStar News. "A range of indicators for market momentum have been improving since the middle of last year, and investor attitudes towards the office sector are gradually reforming."
Reformed attitudes
While the REIT is still contending with lingering occupancy challenges, Hudson executives have pointed to dwindling concessions, a decline in finish-out expenses and stabilizing rents as signals of shifting power dynamics between office landlords and tenants.
Of its nearly 2.2 million-square-foot leasing pipeline, about 700,000 square feet are in late-stage negotiations that are giving Hudson executives confidence that the market's emerging stability will only continue to build.
Other large office owners, such as Piedmont Office Realty Trust and Highwoods Properties, are reporting an amount of leasing not seen since COVID-19 sent workers home and upended demand for the office sector.
Data backs this up. A CoStar analysis shows new leasing volume in the first three months of the year neared 2019 levels, providing "the clearest signal yet that the office market has at last entered the recovery phase." Construction starts are at historic lows, limiting the building supply and leading executives to expect that a national vacancy rate that remains at a record high of 14% will eventually head lower.
Part of that still high vacancy rate can be attributed to tenants flocking to certain types of property: New and modern buildings are still outperforming their older counterparts, or those without fancier bells and whistles like high-end gyms and rooftop bars.
Cohen & Steers' Yablon said Hudson's top-tier portfolio of properties, combined with its management, means the REIT is well positioned to benefit from the improving outlook. The landlord's strengthening financial position will only smooth out the path to capitalize on that momentum, the firm said.
Upside potential
A rosy combination of higher cap rates and the widespread stabilization of the national office market's availability rate has not only helped lure back wary buyers, but has also triggered a rapid spike in lending, with more companies willing to bet on the market's upside potential.
That trajectory has been pushed along by employers returning to the office as well as a decline in the total amount of available office space. What's more, tenants have adopted a less defensive stance to their corporate real estate portfolios, Ponsen said, helping to drive a 10% bump in national office leasing over the back half of 2024 that has set the stage for continued momentum through the remainder of this year.
All of that combined optimism has meant a surge in commercial mortgage-backed securities loans tied to office properties to $11.4 billion in the first quarter of this year, more than triple the amount issued throughout the first quarter of 2024.
It has taken a while for many of those trends to take hold in West Coast markets such as San Francisco and Seattle, but landlords have said the renewed demand for office space and extended leasing pipelines are beginning to translate into recovery.
In San Francisco alone, where Hudson Pacific Properties owns roughly 2.3 million square feet of office real estate, leasing activity has been incrementally rising over the past six months, according to CoStar data, hitting its highest volume since 2022.