Institutional appetite from real estate investors to allocate capital to office investments increased in June, coinciding with an increase in office employment and a gradual return by employees to the workplace. There is, however, a polarization within the office market between the likely winners and losers.
Occupier demand for offices in certain sectors remains robust as employees return post-pandemic. Many corporates are keen to revert, at least in a hybrid form, to the physical workspace. There is a growing recognition of the benefits of the office to businesses in terms of building client relationships, collaboration, and training. Likewise, a significant number of employees, particularly those who do not have the luxury of appropriate workspaces at home, are now looking to get back to the office.
Different factors are driving tenants to expand and upgrade their physical footprints. An attractive workplace is strategically critical for recruitment and retention. In addition, there appears to be an increased demand for more collaborative space. The office of the future must, however, be inviting and needs to provide employees with a reason to return.
Not all offices are made equal. There is a clear divide between those that will and will not attract tenant demand. Alongside the more traditional factors that make an office attractive, such as proximity to a central business district or the size and layout of the space, there has been a marked increase in the significance placed on ESG credentials.
Institutional investors are increasingly focused on brown-to-green strategies for the right building. The belief is that assets with enhanced ESG-type credentials will let quicker, achieve higher rents and attract cheaper financing. In London for example, there is an average 10 percent premium in rents for BREEAM Excellent or Outstanding grade A offices.
In the same way that offices in the wrong location will experience a weak uptake, so too will assets that are likely to become obsolete with regard to current sustainability objectives.
Notwithstanding an increase in institutional appetite for office investment, it is important to identify assets and locations that will provide the right space for occupiers going forward. This involves an analysis of changing characteristics of tenant demand including technical specifications to meet ESG criteria. A specialist approach is therefore necessary to maximize investment opportunities.
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