Much of the discussion around real estate investment (or the lack thereof) this year has revolved around offices. The news cycle appears to be filled with stories about ‘the end of the office’. When WeWork filed for bankruptcy at the beginning of the month it didn’t exactly help the narrative, but in this particular case it could be argued that filing for Chapter 11 bankruptcy was more due to unorthodox accounting practices and poor financial planning than the lack of demand for office space. 

Looking at prime office yields, we see different stories depending on the market. New York, the world’s largest office investment market in 2022, has seen prime office yields remain at 5 per cent since the third quarter of last year. The City of London sees prime office yields at 5.25 per cent - 100 basis points (bps) higher than Q3 last year. Singapore and Tokyo have seen their yields hold steady at 3.3 per cent and 2.6 per cent, respectively, since the start of 2022. 

Despite the low investment figures and negative news cycles, occupational markets are holding up and demand for prime offices has risen. Our Q3 2023 Savills Prime Office Costs shows that  the net effective cost to occupiers for prime office space was up 2 per cent from the previous quarter – proving that occupiers are willing to not only spend, but to increase their spending on top quality offices.

Within the occupational markets, there are bright spots and a few somewhat confusing trends. Over the past year, annual gross rents for prime offices in the Big Apple have increased by 3 per cent and vacancy has dropped from 20 to 17 per cent - a positive (and potentially surprising) story from one of the world’s more pessimistic office markets. 

In London’s West End, prime office vacancy has increased from 4% to 7% since the beginning of 2020. With vacancy rates rising, you would expect rents to decrease. We’re seeing the opposite though; rents in the West End have increased by 8 per cent during this same period. 

It is important to note that the yields, rents, and vacancy rates mentioned above are in reference to prime offices in the midst of a ‘flight to prime’ and a bifurcation between prime and non-prime assets which is only expected to widen. Across London, Grade A rents are expected to increase by 2.4 per cent whereas Grade B rents are forecast to decrease by 0.7 per cent between now and 2027.

Investors aren’t crossing offices off their lists in the future. In our global survey of our research teams, 53 per cent of respondents listed offices as what they expect investors to choose as their top core/core-plus strategy for 2024 – the majority being Grade A. Our researchers also expect prime office investment volumes to return to the long-term trend in the second half of 2024.

It would be naive to say that offices are a sector without concerns – on the occupational side secondary offices continue to suffer – however, it would also be unwise to say that offices are a sector full of problems when prime offices are seeing increasing rents and some drops in vacancy. Offices should also be considered in the context of what is happening in the wider real estate investment markets: all sectors are experiencing similar falls in volumes, with high interest rates and economic and geopolitical uncertainty weighing heavy on them. 

Further information

Contact Charlotte Rushton

Offices: Market view