INTRODUCTION

Office investments have long been a highly favored asset class offering dependable risk adjusted returns. In the new post pandemic environment however, the sector faces a fresh range of challenges which have caused investors to question old orthodoxies.

THE US HAS BEEN PARTICULARLY HARD HIT

In the US the pandemic was followed by the so-called ‘great resignation’ while work from home practices became entrenched particularly in cities with longer commutes and  a tech heavy business environment. Some workers took the opportunity to move further from their places of work to more tax friendly states while in some cities, most notably San Francisco, mismanagement meant that downtowns descended into theft, drug addiction and homelessness. This toxic brew has resulted in a New York vacancy rate of close to 23% while US commercial real estate now faces US$64 billion of troubled assets.

DISRUPTION IS WIDESPREAD

So what has gone so horribly wrong? Challenges appear to fall into four baskets. Cyclical issues include inflation, elevated interest rates and slower economic growth while market specific factors also have a role to play with many markets facing elevated supply, lackluster demand and higher vacancy levels. There are also structural factors at play including the impact of new technologies, demographics, urbanisation, and a shift from manufacturing to services. Lastly, more extensive ESG regulations mean that the cost of environmental compliance has been rising year-on-year.