Can the office make a comeback? | FT Transact

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The office is emerging as the problem child among commercial real estate sectors at the moment.

It's been offices that have been the weakest performer.

So we did hit, last year, the record of vacancy that we've seen in office since we've been recording it since the 1980s.

In a post-pandemic world, we've seen about 20 per cent less demand for office assets across the board.

Last year, office vacancy, for example, in London, the worst since the 2008 financial crisis. And you'd see similar stats, if not possibly worse, in major cities all around the world.

The Asia-Pacific market, it's not that different to what you're seeing in the US and across Europe. Interest rate rises have seen a reduction in the activity in commercial real estate transactions.

The cost of debt has increased significantly. And as that cost of debt has increased we've seen transactional volumes reduce.

Office investment is very, very slow, very slow.

The transition to a green economy is extremely relevant for commercial real estate.

Energy efficiency and office space is a really critical area. And I think in this area you've got push and pull factors. So on the one hand, you have the hard targets that are being implemented by different countries, and that is tough for a lot of building owners. But then on the other side, people who are building or renting these buildings can go out and get an excellent certification from an independent body that says this is a tip-top building, energy efficient, green. And that's something that's a really important marketing tool now, because companies want to be in the green buildings.

We're seeing demand from the occupier really being very discerning and only wanting to occupy buildings that have got good green credentials.

I'd say it's a very polarised market right now. If we look at the office portfolio across Europe, around 70 per cent of all offices were built before the year 2000. So we have a number of offices that are maybe not fit for purpose, but we also know that we're seeing prime rents for well-located, sustainable, high-quality assets has gone up by 20 per cent.

BC quality properties are definitely suffering more than the other properties. Class A is doing quite well, actually, in many markets.

No one would deny that working from home has had a big impact on office.

Europe is definitely the highest adopter of hybrid work models. So it's around 65 per cent of corporates in Europe are really enacting a hybrid work model.

There is an undeniable working-from-home effect on the office sector. We've seen the vacancy rates climbing and climbing, but the way that it plays itself out in the details of that are quite complicated.

The US, Europe, the UK versus APAC, it is different in APAC. So if you think about markets like mainland China, Hong Kong, they very quickly, post-pandemic, went back to a 100 per cent occupancy relative to pre-pandemic. Markets like Japan and Korea also went back to 85 per cent. One of the reasons I think you've seen less of a work-from-home drag across Asia-Pacific is particularly in the markets such as China where you have very dense population. You have people living in very small apartments. You have the cultural element of markets like China and Japan where face-to-face is very important.

If we take London, for example, during 2023, there was about $1.5bn of office assets that were purchased with a specific intent to change the use, to repurpose either to residential or to hotels.

I think a lot of owners will be thinking about... if they're thinking about the future at all, they'll be thinking about alternative uses. It would be great if it worked, because we need a lot more housing, and we don't need quite so many old office buildings, so it is easy to look at from far away and think, oh, that would be a brilliant idea. It really doesn't tend to work.

We've got zoning things to consider. Then you've got natural light, water, utilities, the elevators. How are you going to repurpose that into the living sector? And then, of course, the cost of construction. So often, you look at the economic model or commercial model, and the developer and the investor will look at that and say often the investment thesis doesn't stack up.

It's pretty small as a share of the stock out there so far.

For it to be widespread, for it to really be a story, you need to get the government behind it. So I think governments are going to have to come... municipalities and maybe the federal government are going to have to come around to the idea of providing funding for this.

Our research and our economic forecasters are very confident we hit the bottom of the market in 2023.

If you look at the US, 22 per cent of all jobs are in an office. If you look at Asia-Pacific, 8 per cent of all jobs are in an office. And as you're seeing a maturation of economies, emerging economies growing middle-class urbanisation, you will see more people into office jobs and less into other sectors.

There is a theory out there in the investment community that you will get to a point where the old buildings have started to be taken out of supply where there isn't enough supply of those top-flight buildings that people want. And suddenly, you could have a crunch that would be very favourable for rents.

We do forecast a recovery for office in about two years.

We've seen values stabilise, and we're now at a period in the market where we think the market has bottomed out. And there are good reasons to be optimistic that we'll see more trading and more activity as we go forward.