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The US office market has been in a tailspin since the start of the pandemic, when workers were first ordered to stay home. Some, especially younger workers, never returned — leaving many office buildings half-full or empty.

The overall vacancy rate for offices fell 20 basis points to 18.8 percent in the third quarter, according to CBRE. While this is still historically high, it marks the first year-over-year decrease in vacancies since the first quarter of 2020, when Covid took hold in the US.

According to the report, leasing activity last quarter exceeded the five-year quarterly average, driven by financial services and technology firms. The construction pipeline also fell and is on track for the lowest annual total in a decade.

“I definitely think we’re hitting bottom. I think we’re hitting bottom in 2024,” said Owen Thomas, CEO of BXP (formerly Boston Properties), the largest office rater in the US.

One of these positives is low interest rates. Starting on the debt side, Thomas said the capital office is returning to real estate, where there are many large debt securitizations. BXP has just completed single-asset securitizations on high-end office buildings in New York City and Boston, he said.

BXP is invested almost entirely in the high end of the market, with many of its tenants in financial and legal services. And that, Thomas said, is another positive. Financial services firms are seeing huge revenue growth thanks in part to artificial intelligence. These firms tend to use their spaces more than others.

“These leading companies want to get their people back to the office, and, obviously, they can mandate it, but what they really want is that they want their people to come back to the office,” Thomas said. “That’s why you’re seeing this split in the office business, between the quality buildings that are being leased by the leading companies and then the rest, what we call, the industry’s premier workplace.”

This “premier” tier is roughly defined as the top 10% of buildings. Vacancy rates in these buildings are much lower than the rest of the market — an average of 11% in the cities where BXP operates, Thomas said, adding that asking rents in those markets are 55% higher.

However, premier buildings are not always new buildings. They are also buildings in desirable locations, especially with easy access to mass transit. There is also a new campaign by landlords of second-tier buildings to compete with so-called Class A properties.

“There are a lot of office landlords today that have a strategy of, we’re not trying to be a co-working space provider, we’re trying to be the best B-building provider,” Thomas said. “They’re fixing up their buildings. They’re providing some of those amenities, and they’re providing a higher value-based price point. So I think a lot of the demand will go to that.”

BXP, for its part, is not particularly interested in acquiring these buildings, he added. Instead, it’s pouring investment capital into new developments, most recently launching a $2 billion project at 343 Madison Avenue in New York City. Even with the construction timelines, Thomas said the resulting output is far superior to existing, even bargain-priced buildings.

As for Mayor-elect Zohran Mamdani’s impact on the city’s real estate, Thomas is cautiously optimistic.

“Our success in any one community depends on the success of our community, so if the city isn’t successful, we can’t be either. We want to do what we can to help him figure out some of the things he promised as a candidate,” Thomas said, noting specifically housing affordability and public safety.

“I’m not sitting here saying I think it’s necessarily going to be a positive, but I think, given the state’s approval rights on a lot of things, and in some of the early decisions, as I see it redefining the chief of police, I think some of them are making us feel constructive about what the outcome might look like,” Thomas said.

He points to New York City’s lead in residential housing as a model for other cities, because rents are so high that deals work financially. New York also offers tax incentives for developers, which Thomas called encouraging.

As for the rest of the country, the conversion won’t solve the office vacancy, Thomas said.

“The office market as a whole is overbuilt. There are going to be buildings that have been torn down and built into something else. We’re doing some of that in the suburbs,” Thomas said. “But the change, when people come to this subject, is what they think will be the answer.

“That’s going to be the answer. It’s not the answer,” he said.