The most telling phrase in Michael Lee's interview with IREI is not about tenant demand or lease extensions. It is the word 'scar tissue.'
Lee, a principal and partner at HKS Real Estate Advisors, is describing the collective memory of lenders and buyers who lived through the office market's post-2020 dislocation. The fundamentals are improving. Tenants want space. Leases are extending. But the capital that burned its hands on office is not rushing back. It is returning slowly, selectively, and with a longer memory.
That distinction matters more than any single leasing statistic. The market is not broken. It is cautious. And caution in capital markets is not the same as confidence.
HKS Real Estate Advisors has completed more than $30 billion in transactions across debt and equity advisory. When a firm of that scale says buyers and lenders remain selective, it is not a throwaway line. It is a description of where the market actually lives: between improving demand and still-restrictive underwriting.
What does selective mean in practice? It means lenders are not underwriting to peak rents or optimistic vacancy assumptions. They are underwriting to today's cash flow, with a cushion for tomorrow's uncertainty. It means buyers are not paying for future upside. They are paying for current income, and only if the basis allows a margin of safety. It means the bid-ask spread has narrowed, but it has not closed.
The scar tissue is visible in the capital stack. Office loans that get done today tend to have lower leverage, higher debt yields, and shorter terms than their pre-2020 equivalents. Lenders are asking for more equity, more recourse, and more sponsor liquidity. The days of 65% loan-to-cost on a speculative office development are not coming back soon, if ever.
This is not a bad market. It is a disciplined one. But discipline feels like pain to owners who remember 2019, when capital was abundant and underwriting was generous. The adjustment is not over. It is just entering a new phase where improving fundamentals meet hardened lender standards.
Who benefits from this environment? Sponsors with strong balance sheets, low-basis assets, and long-dated debt. They can wait out the selectivity. Who is exposed? Owners with maturing loans on assets that were financed at peak values and have not yet seen a rent reset. They face a refinancing market that is open but expensive, and only for the right story.
The next thing to watch is not leasing volume. It is the spread between office debt costs and office cap rates. If that spread compresses, equity returns become viable and transaction volume picks up. If it stays wide, the market remains a series of one-off trades rather than a broad recovery.
Lee's interview is a reminder that capital markets are not driven by hope. They are driven by experience. And the experience of 2020 through 2023 has left a mark. The office market is healing, but scar tissue does not disappear. It changes how the market moves.