RFPnetworks Office Real Estate Statistics 2022 depicted by empty office.
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Revisiting Office Real Estate

Office Real Estate
Real Assets

Revisiting Office Real Estate

RFPnetworks Office Real Estate Statistics 2022 depicted by empty office.

Real Estate Investment Managers seem more bullish on Offices than investors. Do their stats add up? Or does the segment more time to find it's equilibrium.

Office Real Estate is arguably still in disequilibrium. There are three issues that investors are contending with:

Firstly, demand has changed. Working From Home has undeniably impacted required floor space. The extent to which may not be known for several years, as fixed term leases expire, and a new hybrid working culture evolves.

These demand changes have manifested themselves differently in different cities across Europe, the U.S. and Asia Pacific. And in turn, whilst vacancy rates may have started to stabilise, it may too early to draw comfort from the numbers. But these numbers are clearly important, as they will have a causal effect on landlords ability to raise rents.

On the supply side, the issues are different. Declining profitability as a result of higher input prices may not go away soon. An issue which is compounded by both the reduced supply and increased cost of capital.

Yet despite the above, real estate asset managers seem bullish. The statistics they are producing appear to support their view that the reality and outlook is better than perceived. Whether investors assign high confidence levels to these statistics remains to be seen.

RFPnetworks U.S. CRE Research depicted by androgynous Generation Z individual

Demographics and U.S. CRE

The stable historical relationship between office demand and employment growth has been challenged by hybrid working, with some estimates pointing to a 4% resultant increase in office vacancy rates. But investors attention has now turned to a different relationship. The impact of demographics on U.S. commercial real estate. The numbers are striking.

The cross-generational characteristics of the labour market is changing. Whilst the millennials over filled the work force after the Global Financial Crisis, the baby boomers were also still hard at work. Roll forward to today, we have a situation where baby boomer retirement is not being compensated by enough Generation Z labour market entrants. Added to which is a declining population not being compensated by immigration growth in the U.S., making for even tighter future labour markets.

And as the labour market tightens, employers will have to lean in to the desires of the workers that remain. Both in terms of the city in which they locate their offices, and the attractiveness of the working environment to Generation Z employees.

Identifying opportunities in U.S. Commercial Real Estate in the future, may be less about employment growth, and more about identifying assets that create an attractive working environment for Generation Z employees.

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Aegon Asset Management on RFPnetworks U.S. CRE Research Feed depicted by Generation Z crossing the road.
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Careful market selection beats demographic headwinds

Aegon Asset Management

US commercial real estate (CRE) investors are well-versed in the importance of economic growth to property investment performance. Focus on the Covid-19 recession, policies to truncate it, and the path of recovery have dominated the attention of analysts for more than two years. Macroeconomic factors continue to dominate attention now, well into 2022, as inflation in the Covid-recession’s aftermath complicated by Russia’s invasion into Ukraine have taken the spotlight. All eyes are now on the prospects for the US Federal Reserve (Fed) to accomplish a soft landing. Looking further ahead, US CRE will confront another challenge embodied in weakening demographics. In the paragraphs below, we identify the components of weakening demographics measured nationally and highlight differences across US metro areas. The differences illustrate the importance of careful metro market selection to counter demographic headwinds in the years ahead.
RFPnetworks Green office research depicted by premium real estate concentrated in city centre.

Is The Green Office Premium Sustainable?

The focus on Green Rating Certifications by office real estate investors has driven the EU building stock to new levels of efficiency. Which in turn has shown a quantifiable premium for rent and asset valuations. But with approximately three quarter of EU Buildings now rated as efficient, the question is whether this Green Premium will continue to be a differentiating factor.

The answer may depend on rating concentration by location and building value.

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What's the difference between working from home or the office?

It has taken 2 years for restaurant and flight activity in the U.S. to return to their pre-pandemic levels. The same cannot be said of offices.

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Office Real Estate 1H22 Stats

Across Europe's top 25 markets, 5.6 million square metres of commercial office space was let in 1H22. This was above the long term average trend for first half reporting and represents an increase of 41% on 1H21.

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The Impact of Hybrid Working on Office Real Estate

One empirical observation that attracts professional investors to the real estate market is landlords ability to raise rent above inflation. But this assumes that vacancy rates are low and tenants are prepared to pay. How does that rationale translate to the office market, two plus years into COVID?

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