UOB Kay Hian
Date of Report: 12 September 2025

US Office REITs: Market Recovery Accelerates as Interest Rates Fall and Leasing Confidence Returns

Sector Overview: Renewed Optimism for US Office REITs

The US office real estate investment trust (REIT) sector is showing signs of a robust turnaround, driven by a resurgence in M&A activity, a recovery in commercial mortgage-backed securities (CMBS) issuance, and improving office demand. This positive momentum is further bolstered by anticipated interest rate cuts, easing trade tensions, and a shift back to office-based work.

Key Highlights: Why US Office REITs Are Back in Focus

• M&A Activity Signals Market Bottom: The proposed privatizations of City Office REIT and Orion Properties mark a significant inflection point, reflecting investor confidence and the ability to capitalize on attractive valuations.
• Leasing Momentum Builds: Tenant requirements have surged to the highest level since Q4 2021, with leasing activity expected to grow 5% in 2025. The second half of 2025 is poised for a demand rebound, supported by improved business sentiment and limited new office supply.
• CMBS Market Revives: CMBS issuance rose 35% year-on-year to US\$59.6 billion in 1H25, the strongest in 18 years, with office-backed CMBS comprising a significant share. This resurgence suggests lenders are regaining confidence in the sector.
• Interest Rate Tailwinds: Anticipated Federal Reserve rate cuts totaling 100 basis points over the next several months are expected to bring the Fed Funds Rate to 3.25%, easing refinancing pressure for office landlords.
• Enhanced Liquidity from Singapore Initiatives: The Enhanced Equities Market Development Programme (EQDP) is set to deepen trading liquidity for small and mid-cap (SMID) REITs, positioning KORE and PRIME as key beneficiaries.

Peer Comparison: US Office REITs at a Glance

KepPacOak US REIT (KORE): Defensive Positioning Amid Recovery

• Occupancy Outlook: Management anticipates a slight dip in portfolio occupancy, expected to settle at 86-88% by year-end 2025, primarily due to known vacates totaling 174,000 square feet.
• Payout Recalibration: The payout ratio assumptions have been adjusted to 25% in 2026, 40% in 2027, 55% in 2028, and a stabilized 70% from 2029 onward.
• Attractive Yield, Low Valuation: KORE trades at distribution yields of 4.1% for 2026 and 6.5% for 2027. Its price-to-net asset value (P/NAV) is notably low at 0.36x, reflecting significant value relative to its assets.
• Recommendation: Maintain HOLD with a target price of US\$0.26, as the REIT offers stable yields amid a gradually improving market environment.

Prime US REIT (PRIME): Leasing Momentum Drives Outperformance

• Leasing Activity Accelerates: Following the Labor Day long weekend and the end of summer holidays, property viewings have increased. Noteworthy leasing discussions include 121,000 square feet with a government agency at Park Tower and 39,000 square feet with a financial services firm at Village Center Station 1.
• Occupancy Recovery: Portfolio occupancy is expected to rebound, reaching 85% by the end of 2025.
• Payout Ratio Strategy: Assumed payout ratios are 50% in 2026, 65% in 2027, and 80% in 2028, supporting a robust distribution outlook.
• High Yields, Deep Value: PRIME offers compelling distribution yields of 9.1% for 2026 and 12.0% for 2027, with a P/NAV of just 0.38x, highlighting substantial upside potential for investors.
• Recommendation: Maintain BUY with a target price of US\$0.31, as leasing momentum and strong yield prospects make PRIME an attractive opportunity.

Sector Catalysts and Risks: Roadmap to Recovery

• Work-From-Office Revival: The shift toward office-based work, combined with limited new supply, is expected to restore equilibrium to the market.
• Interest Rate Easing: Lower borrowing costs will facilitate refinancing for office landlords, reducing financial stress and supporting future growth.

Yield and Valuation Trends: Visual Insights

Conclusion: A Promising Path Forward for US Office REITs

The US office REIT sector is at a pivotal moment, with multiple tailwinds driving renewed investor confidence. Falling interest rates, stronger leasing activity, and improved market liquidity are setting the stage for a meaningful recovery. KepPacOak US REIT (KORE) and Prime US REIT (PRIME) stand out as key plays—KORE for its defensive yields and PRIME for its attractive upside and robust leasing pipeline. Investors seeking yield and value in the office REIT space should closely monitor these developments as the sector continues its path to normalization.

Disclosures

This article is based solely on research and analysis from UOB Kay Hian, dated 12 September 2025. For further details, please consult the full research report or contact your financial adviser.