By Saeed Azhar, Matt Tracy and Carolina Mandl

NEW YORK, March 7 (Reuters) - Investors including Blackstone BX.N and wealthy individuals are scouting for office properties in New York as companies call employees back to the office, fueling a nascent recovery in the battered commercial real estate market.

The increasing appetite for offices in New York and beyond could signal a broader economic recovery for major cities worldwide as many workers return in person five days a week, lifting demand for local services. The turnaround comes after investors shunned emptied-out commercial spaces for years after the pandemic.

Real estate investors, consultants and bankers say demand is rising for top-quality offices in New York, spurring them to strike more deals. Among the bullish signs are Amazon hunting for space, BXP holding talks with tenants for new building and Blackstone getting more optimistic on the sector.

Blackstone's President Jonathan Gray said offices in New York City and San Francisco offer compelling value.

"In New York, you have financial services firms who are growing rapidly, you don't have any new building," Gray told a conference on Tuesday. "In San Francisco, the values fell very hard, in some cases 75%, and AI and technology innovation really (are) housed in San Francisco."

Blackstone had drastically cut its exposure to office in recent years. Its current office exposure accounts for less than 2% of its real estate holdings, versus more than 60% in 2007, according to company data. Investors struck more office deals last year as the terms for leases improved and tenants became more active, consultants said.

Among those, Blackstone is looking to purchase a large stake in the office building at 1345 Avenue of the Americas in Manhattan. It has declined to comment on its investment plans. "More deals of scale are definitely coming," said David Giancola, a senior managing director of capital markets in the New York office of JLL JLL.N.

However, distress still exists for older Class B and C buildings, some mid-block or buildings which have no view and are impossible to rent, said Ran Eliasaf, founder and managing partner at real estate private equity firm Northwind Group.

Economic growth and lower interest rates are also boosting demand for offices, senior industry executives said.

"The world is moving back to work and back to in-person work, no question about it," said Owen D. Thomas, chairman and CEO of Boston-based real estate investment trust BXP Inc BXP.N. "Real estate is a financial asset driven by interest rates, so that's helpful," he added.

BXP is in talks with four to five anchor tenants to build a 46-story tower in Midtown Manhattan, Thomas said.

The commercial project is not far from JPMorgan Chase's JPM.N new global headquarters, which has space for 14,000 employees and will be completed by the end of this year.

With some of the largest office occupants in the U.S. - such as Amazon and JPMorgan - switching to five days a week of in-person attendance, firms could encounter space shortages after they shed offices over the last five years, JLL Research said in a note.

Amazon is looking for more space in New York, according to a source familiar with the matter. The company declined to comment.

NEW BUILDING

When billionaire Ken Griffin decided to combine the offices for his hedge fund Citadel and market-maker Citadel Securities in midtown roughly three years ago, he could not find enough space. He decided to construct a new building instead, getting ahead of a wave of 5-day mandates that are filling up offices.

Griffin, alongside $Vornado Realty Trust(VNO-N)$ VNO.N and Rudin Management, is developing a 62-story skyscraper at 350 Park Avenue with space for 6,000 people. Citadel and Citadel Securities will serve as anchor tenants for the building, which is expected to be completed by 2032.

Employees at Griffin's firms will start moving to a temporary location next year so that the current building, a 30-floor structure from 1960, can be demolished.

The outlook is reflected in cap rates, a measure used by investors to gauge a property's profitability and risk. Cap rates rose sharply after the pandemic, making it less attractive for investors to buy properties.

After peaking at 6.99% in the first quarter of 2024, the gauge fell to 5.77% by the end of the year, signaling better returns for investors, data from research firm Trepp showed.

Sales volumes for commercial properties in the U.S. also rose 9% in 2024 after falling by half in 2023, according to property consultants CBRE CBRE.N.

Occupancy has climbed after declining sharply during pandemic shutdowns and remote working, analysts said.

According to data from commercial real estate advisory firm Avison Young, office utilization in Manhattan was 79.9% in January 2025 versus 66.9% across offices in major and secondary cities in the United States compared to the pre-pandemic level.

The city's commercial buildings have diverse tenants from a range of industries, including finance, insurance and technology, said Doug Middleton, vice chairman with CBRE's Investment Properties group. Other cities are more reliant on one or two industries, he added.Wealthy individual investors are also starting to step back into investments in higher-quality class-A offices, spurring the bank to finance deals, said Nishi Somaiya, Goldman Sachs' global head of private banking, lending and deposits.

"Our CRE loan portfolio in the private bank is growing, which tells you that there's a lot of demand and confidence in opportunities within the sector," she said.

In Europe, soaring demand for high-quality offices is pushing rents to records in central London, giving investors cause for optimism even as overall office sale volumes remain at multi-year lows.

"People got very excited post-COVID that this was the end of the office - it was never the end of the office," said Hugh White, a London-based senior director at BNP Paribas Real Estate.

(Reporting by Saeed Azhar and Carolina Mandl in New York and Matt Tracy in Washington; additional reporting by Iain Withers in London and Davide Barbuscia in New York; editing by Lananh Nguyen and Nick Zieminski)

((Saeed.Azhar@thomsonreuters.com; +1 347 908-6341; Reuters Messaging: saeed.azhar.reuters.com@reuters.net))