Office real estate's comeback in a diversified market

The commercial real estate (CRE) landscape in Asia Pacific (APAC) is undergoing significant transformation, driven by economic shifts, geopolitical complexities and evolving market dynamics. As we navigate through 2025 and beyond, understanding these changes is crucial for industry leaders and decision-makers. In this article, I look at the key trends that will shape the future of CRE in the region, with a particular focus on the resurgence of the office sector amidst the continuing strong interest in asset classes like logistics & industrial and the growth of alternative assets like  data centres and living (e.g. multifamily/build to rent, senior housing, student accommodation and co-living).

Before we delve into the topic, we cannot ignore the implications of Trump 2.0 and the potential impact of the recent U.S. tariff announcements.

President Trump’s first 100 days have been marked by significant shifts in U.S. economic policy, leading to heightened uncertainty in global markets and creating a ripple effect across the APAC region. The tariff situation continues to evolve and as of the time of writing, Trump has put a 90-day pause on his earlier tariff announcements globally, with the exception of China. However, there are signs that the strong line with China may soften. Stock markets continue to be jittery as they await the outcomes of the multiple negotiations and China’s retaliatory actions. What is clear is that these shifting trade policies create uncertainty, impacting inflation and economic growth trajectories across the world. The longer uncertainty prevails, the greater the potential impacts on CRE markets across the region.

Macroeconomic Implications

The APAC economy, which entered 2025 in a strong position, now faces potentially slower growth due to these uncertainties. However, strong domestic consumption within the region is expected to provide a partial buffer against potential tariff impacts, noting domestic consumption patterns vary markedly across the region.

Interest Rates: A Downward Trajectory

Despite increased macroeconomic uncertainty, central banks across Asia Pacific continue to lean towards a more accommodative monetary stance. Inflation arrived later in the region, resulting in a lag in the rate-cutting cycle compared to the U.S. and Europe. Most central banks have cut rates by around 50-75 basis points from their peak, with Japan being a key exception. Ongoing volatility in the bond market is expected but the overall trajectory for interest rates remains downward. Investors should focus on central bank messaging and forward guidance to navigate these fluctuations effectively.

Impact on Commercial Real Estate

Historically, APAC’s property markets have shown resilience under varying political landscapes. During Trump's first term, the region's economy grew at a healthy rate despite similar policies, suggesting resilience in the face of trade disruptions. Office vacancy rates remained stable and rental rates appreciated during that time.

The APAC real estate market entered 2025 with momentum, driven by healthy occupier demand and increased investment activity. However, the manufacturing sector, particularly those exporting to the U.S., could be significantly impacted by any new tariffs. This could lead to a slowdown in leasing and investment activities as decision-making is delayed. Nevertheless, market fundamentals across the region remain resilient and historical trends suggest that the region can quickly rebound once conditions stabilise.

Asset Pricing: Stabilisation and Nuanced Assessments

Interest rate hikes, structural changes and growth normalisation have driven a softening of commercial real estate values. However, aggregate measures indicate that the majority of repricing is now over. Asset quality, building location and tenant covenant have made valuation assessments highly granular and nuanced. Markets are expected to enter a period of pricing stability, with outperformance driven by careful asset selection and innovative strategies to secure and grow net operating income.

Capital Availability and Growth in Investment Volume

Fundraising has slowed since its peak in 2021, with significant reserves of dry powder capital deployed through 2024. As interest rates continue to fall, fundraising activity is expected to regain momentum, especially if confidence can be restored quickly. The return of institutional investors is anticipated as core asset strategies come back into play. This will drive capital deployment into the CRE sector, particularly into high-quality assets.

Investment volumes in the region have modestly increased since mid-2024. Defensive and growth sectors like logistics & industrial and alternatives will continue to lead the recovery. Nevertheless, the office sector remains the most traded in the region, with ongoing recovery expected as fundamentals improve.

Office Sector: A Resurgence

Once the cornerstone of commercial real estate portfolios, the office sector has come under scrutiny in the post-pandemic era. Work-from-home trends, evolving tenant demands and changing urban dynamics have redefined the value proposition of office assets. In contrast, other sectors like logistics, data centres and multifamily housing have gained momentum. Yet, with repricing, evolving work models and a renewed focus on quality, the office sector is staging a strategic comeback in certain markets.

Some of the key trends that have led to the resurgence of the office sector include the following:

• Significant corrections in capital values in recent years have opened a window for opportunistic and value-add investors. Core-plus assets in prime locations are trading at discounts, thereby offering higher yields, not seen in a long time.
• The bifurcation of the office market is fully in play as a flight to quality by occupiers prevails. Agile spaces, sustainability credentials and employee well-being have become top priorities for office tenants. Trophy assets – those that are well-located, ESG-compliant, tech-enabled and offer hospitality-style amenities – are attracting strong tenant demand and commanding premium rents.
• The spotlight on office obsolescence and the need to reposition assets intensified after the pandemic as occupier preference for higher quality and better amenity stock gained momentum. However, there is still demand for well-located A- / B-grade spaces that have high levels of service and local amenity. Office property owners in some markets such as Australia, Singapore, Hong Kong and Japan have embarked on this repositioning journey to unlock the value of their older assets through enhanced rental income, increased valuation and improved tenant appeal. With approximately half of APAC’s existing office stock being secondary grade and only 43% of the prime-grade stock having any form of sustainability accreditation, the repositioning trend is likely to pick up pace as investors seek to extract more value from existing assets amid tighter capital markets. This then paints a positive picture of the office sector as it continues to rejuvenate itself.

The Asia Pacific Point of View

Asia Pacific is experiencing expansion across numerous metrics, including economic growth, job creation, and disposable household income. Office attendance has rebounded quickly, particularly in Greater China and North Asia, supporting demand for space.

Office yields have softened across the region, but declines are largely over, with yields forecast to remain stable through 2025. Rental growth is expected to pick up across the region over the next 2-3 years, as near-term new supply starts to dry up in certain markets and sub-markets.

The region continues to record buoyant office space demand, with net absorption averaging 75 million square feet (msf) per annum over the 2025-29 forecast horizon. India remains the main driver of the region’s office market, accounting for over half of the region’s demand, underpinned by the expansion of domestic companies, flexible space operations and the burgeoning global capability centre market. Consequently, the tech-focussed cities of Bengaluru and Hyderabad lead regional office demand, forecast at 12.4msf and 8.1msf respectively in 2025.

Regionally, 121msf of new supply is forecast to enter the market this year, with a further 110msf in 2026 and 2027. Cumulatively this increases the region’s stock by 11% to over 2.3 billion square feet in 2027 – practically doubling the regional total since 2016. While much of this new supply will enter the region’s largest markets of Shanghai and Bengaluru, notable increases are also forecast in Tokyo, Shenzhen, Guangzhou, Hong Kong and Chennai this year.

With strong office demand and robust supply of office space, the sector remains a significant avenue for capital deployment in APAC, which has the highest allocation to offices compared to other regions. As interest rates trend downwards, fundraising activity is expected to increase, with the office sector remaining a key target for investors. The rise of alternatives provides diversification opportunities but the office sector's established demand and liquidity continue to attract substantial investment. In addition, the office sector's stability and potential for yield compression make it an attractive investment option.

Conclusion

The future of CRE in Asia Pacific is shaped by a wide range of economic, geopolitical and market dynamics. Understanding the impact of tariffs, interest rates, asset pricing, capital availability and investment volumes is crucial in navigating this evolving landscape.

While alternative assets remain compelling, the office sector's correction in recent years and ongoing reinvention highlight its enduring appeal and potential for growth. Against a backdrop where value is scarce and uncertain, investors with resilience and strategic foresight can unlock new opportunities and the right office play could potentially yield significant returns over the longer term for the shrewd investor.

Note: For further insights on the implications of the Trump administration's policy shifts on commercial real estate, please refer to Cushman & Wakefield’s report - Trump 2.0: The First 100 Days – Implications for the APAC Economy & Property Markets.