U.S. Class B and C Office Buildings Face Basis Reset as Higher Interest Rates Pressure Owners

Written by:

Rudi Davis

Date:

16 Apr 2026

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Class B and C office buildings, typically older properties with fewer amenities and lower rents than premium Class A offices, are facing a widening gap between owner expectations and current financial conditions. Rising interest rates have increased the cost of capital, making acquisitions, upgrades, and repositioning strategies harder to justify.

As a result, many of these mid- and lower-tier office properties remain stuck between outdated valuations and limited buyer demand. According to Andrew Lofredo, Founder and CEO of CRE Vertical Advisors, the current cycle favors investors with long-term capital and a willingness to fund improvements without relying on quick refinancing or exits.

Market Split Widens

Class B and C office buildings face a growing disconnect between expectations and market realities. Higher borrowing costs have reduced transaction activity and limited reinvestment in aging properties.

“It’s the owners willing to invest and create an atmosphere that can reposition those properties,” Lofredo says. He adds that not all investors have the resources or patience for long-term strategies.

The issue is structural. Class A and trophy office properties are beginning to recover, with leasing activity improving and companies returning to higher-quality spaces. In contrast, Class B and C buildings continue to lag.

This has created a split market. Top-tier properties are stabilizing, while lower-tier assets face weak leasing and uncertain valuations. In the past, rising Class A rents pushed tenants toward more affordable Class B and C spaces. Today, higher interest rates have disrupted that pattern, leaving many properties without consistent demand.

Low Rates Distorted Values

Owners who acquired or refinanced properties during periods of low interest rates now face a different financial reality. Deals that worked at three percent interest often no longer work at six or seven percent. Ownership costs have increased, but many sellers have not adjusted their expectations.

“It was easy to add value when you could do a deal based on low interest rates,” Lofredo says. “Now that rates are up, not every seller has accepted that ownership costs are higher.”

This gap has created a standoff between buyers and sellers. Buyers base their offers on current financing conditions and lower valuations, while sellers continue to anchor to pricing from recent years. As a result, transactions stall and properties remain on the market.

Class B and C buildings face additional pressure because many require upgrades to stay competitive. Improvements such as HVAC systems, lobby renovations, and tenant amenities require significant capital. With borrowing costs elevated, these investments are harder to justify, especially for owners facing near-term refinancing or sale timelines.

Long-Term Investors Step In

Despite these challenges, long-term investors are beginning to find opportunities as pricing adjusts. Lofredo describes this shift as a basis reset, where properties trade at values aligned with current conditions rather than past market peaks.

“You can actually invest in these office properties,” Lofredo says, noting that Class B and C assets continue to trail trophy properties.

Success in this environment depends on financial staying power. Investors must hold properties through years of repositioning without relying on quick exits. Family offices and high-net-worth investors often have an advantage because they can operate on longer time horizons.

Lofredo’s firm primarily works with family offices to structure long-term acquisitions. These investors aim to acquire properties at discounted prices, invest in improvements, and realize value as market conditions stabilize.

Identify Viable Properties

Not every Class B and C office building is a viable investment. Some are functionally obsolete due to outdated layouts, poor locations, or physical limitations that cannot be easily corrected.

Lofredo emphasizes the importance of distinguishing between properties that can be improved and those that cannot. Investing in obsolete buildings can result in significant losses.

Stronger opportunities are typically located in desirable submarkets with access to transportation and nearby amenities. Buildings with flexible layouts, adequate parking, and adaptable infrastructure are better positioned to meet modern tenant expectations.

To pursue these opportunities, CRE Vertical Advisors is launching a co-GP fund to invest alongside its family office clients in repositioning projects. This structure aligns incentives by committing the firm’s capital alongside investors.

Outlook Requires Patience

The market for Class B and C office buildings is defined by stalled transactions, higher borrowing costs, and the need for substantial capital investment. Owners who fail to adjust pricing expectations may struggle to sell or refinance their properties.

At the same time, investors with long-term capital and disciplined strategies can find value, provided they avoid fundamentally flawed assets.

As the office sector adapts to higher interest rates and changing tenant preferences, success will depend on patience and careful asset selection. Properties backed by long-term investors are more likely to recover as the market stabilizes, positioning them to benefit from the ongoing repricing cycle.