Barclays said in a note on Thursday that it views the U.S. office sector more favorably than its European counterpart, citing weaker tenant demand in Europe and comparatively more attractive valuations among American office real estate investment trusts.
Analyst Eleanor Frew told investors that the bank remains cautious on European office landlords because tenant demand has softened since the pandemic. "In Europe we have, since pandemic-era lock-downs were lifted, been broadly cautious on Offices due to reduced tenant demand," she wrote, pointing to the growing adoption of hybrid working and higher capital expenditure requirements as tenants seek better-quality space.
Frew noted a widening split in demand across building quality. "Demand for the best space... [is] actually increasing, whereas the worst space is effectively obsolete," she said, describing a market where prime offices attract tenants while lower-grade properties struggle to compete. That polarization, she added, has been accompanied by limited investor support for the sector amid "low EPS growth or in some cases declining EPS outlooks" and wider questions about the structural future of office work.
By contrast, Barclays sees a stronger case for U.S. office assets. The bank is "more constructive on US Office, due in large part to the 10-22% YTD sell-off of our US coverage," Frew wrote. Leasing conditions in the United States have shown gradual improvement, although tenant incentives such as free rent or fit-out contributions remain elevated.
Barclays expects those incentives to wane through 2026 and 2027, forecasting that a reduction in incentives should translate into "higher economic occupancy, higher cash rents, and waning TIs." The firm cautioned, however, that upcoming lease expirations could prompt tenants to downsize or otherwise increase vacancy if current leasing momentum weakens.
The note frames Barclays' relative preference as driven by valuation and market dynamics rather than a blanket endorsement of office property everywhere: Europe faces structural demand headwinds for lower-quality space, while the U.S. market is benefiting from a material price adjustment and improving leasing fundamentals tempered by short- to medium-term incentive dynamics.
More to watch: Leasing trends, tenant incentive levels, and the pace of lease expirations in both regions will be key indicators for future sector performance.