A rebound in commercial real estate—driven by improving fundamentals—is increasing institutional interest in the asset class. A mid-year outlook report from Hines noted that the market is thawing, although the opportunity set in real estate remains selective, while capacity constraints are driving the strongest opportunities in select markets.
The real estate recovery, while slow, has reached a point at which institutional investors are now comfortable with participating in the recovery of several CRE sectors, including office space, according to the report.
“Now that fundamentals are improving, we’re moving into what I call the institutional part of the recovery cycle,” says Joshua Scoville, Hines’ global head of research. “Those fundamental improvements are visible, and so institutions can get more or less comfortable with [taking on] that risk and participating in that recovery.”
The asset class—which has faced multiple, related headwinds in recent years, including the COVID-19 pandemic, the rise of remote and hybrid work, and high vacancy rates, has shown clear signs of a recovery.
The second quarter of 2026 was the fourth consecutive quarter of positive absorption in office, according to Hines. A full recovery in the sector is still a ways away—the U.S. scored a 26 out of 100 in Hines’ leasing framework, the weakest number among all CRE subtypes.
“While private capital remains comparatively more active, we are seeing more institutions become engaged,” says David Bitner, executive managing director of global research at Newmark. “Office fundamentals have begun to improve, as 2Q 26 marked the third consecutive quarter of positive net absorption.”
The Best Markets
For some sub-sectors of the asset class—including office, specifically—the recovery has been more selective, with growth occurring in top-tier markets. Capital then flows to markets with improving fundamentals and to premium assets capable of attracting the strongest tenants, while lower-quality properties continue to face pressure from changing workplace trends.
Markets such as New York have benefited from a lack of supply of Class A office space, which is increasingly commanding higher rents. San Francisco, several sources note, has also seen an uptick in leasing activity, largely from artificial intelligence companies.
“San Francisco and Manhattan office markets have seen significant increases in leasing activity, and their respective trophy sectors are rapidly running out of space,” Bitner says. “These are the most exciting stories in office markets, but not the only ones.”
Varun Chari, a partner in law firm Levenfeld Pearlstein, adds that amenities are driving the value of leasing prices for offices.
“Approximately 80% of 2025 U.S. office leasing landed in Class A, and the owners winning that share are investing in experience managers, curated programming and reimagined amenity floors,” Chari says. “The hospitality shift and amenity focus belong in underwriting, because repositioning a building for that shift is increasingly the cost of remaining competitive.”
Despite a strong recovery from lows, the commercial real estate sector still has room to improve, and tailwinds persist.
“[We have] identified two interlocking challenges for commercial real estate investment in general and office in particular. Demography and immigration point toward low-trend job growth at least over the next five years, [and] AI is likely to further mute office-using employment,” Bitner says. “Office can perform in this environment, but it has to be office that caters to companies with high human capital and rising profits, for whom office functions as a luxury good.”
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Tags: Real Estate