This report has supported the increasingly widely held view that we are now largely through the worst of the inflation cycle, and while we haven’t necessarily seen the full extent of the asset pricing adjustment to this ‘new world’ for all sectors and markets, it does seem like we have had the majority of the move now.

You could be forgiven for reading the general research and market commentary out there and feeling like ‘nothing’ is going on, but this isn’t the case. Yes, investment volumes are down, but there is still a market.

There are more willing buyers than there are sellers, and we are now seeing buyer competition on many of our sales. Admittedly, there is often a large pricing spread, but competition should further aid stabilisation.

We are also seeing increasing examples of owners refinancing assets that they had been trying to sell (which is further suppressing transaction volumes). Despite being offered very difficult financing terms and having to inject equity into capital stacks, some owners are choosing this route over crystallising their exit with today’s equity bids.

This tells us that at least some believe the conditions we are currently in are short-term, and while we may not get back to where we were, they are willing to keep going, pay the price to live another day and hopefully exit into a stronger market going forward.

If all hope was lost, then they would not be doing this. The fact that there are more buyers than sellers also points to the same conclusion from most, that things will get better and investors will only sell today if they have to, or if they get the ‘right’ bid (this also helps to stop the market experiencing further major price falls).

Negative market evidence will be created by situations where owners’ hands are being forced, which will, in turn, be used by valuers, which will of course not help with near-term stability. However, there is also evidence of core assets trading at levels that beat market expectations, as has been the case throughout the last 12 or so months. So to maximise chances of liquidity today, an asset needs to be ‘special’ or ‘good relative value.’

This report is focused on the capital markets more so than leasing activity, but if you want to find it and actually believe it, there is a body of good news there. So to reiterate some of my sentiment from last quarter’s report…not all offices are bad, and not all the bad ones have no future. There is plenty of data to support tenant demand and rental growth for the right office buildings.

Things will get better. There is a need for deep and nuanced analysis, market by market, coupled with good advice, and then, like with most things, fortune will favour the brave.

Key transactions

Methodology

Net initial yields are estimated by local Savills experts to represent the achievable yield, including transaction and non-recoverable costs, on a hypothetical Grade A building located in the CBD, over 50,000 sq ft in size, fully let to a single good profile tenant on a long lease. The typical LTV and cost of debt represent the anticipated competitive lending terms available in each market. Cash-on-cash returns illustrate the initial yield on equity, assuming the aforementioned LTV and debt costs. The risk premium is calculated by subtracting the end-of-period domestic ten-year government bond yield (as a proxy for the relevant risk-free rate of return) from the net initial yield. Data is end-of-quarter values.

_{Read the articles within Taking Stock: Capital Markets Quarterly – Q2 2023 below.}