Beware of investing in commercial property

With many companies are planning to adopt a “hybrid” working model once the pandemic is over, the market for office property is facing a reckoning.

The market for office property is facing a reckoning. Many companies are planning to adopt a “hybrid” working model once the pandemic is over, with weeks split between days in the office and days working from home. That means they will require less floorspace than before. A survey of Britain’s 258 biggest firms by PwC found that half have plans to “cut the size of their property portfolios”, says The Times. Planned reductions amount to “nine million sq ft” of space. That’s equivalent to 14 London skyscrapers-worth of floorspace that nobody wants.  

“Globally, more than 103 million square feet of office space has already been vacated since the pandemic began”, according to data from broker Cushman & Wakefield, says The Economist. Moody’s Analytics thinks “roughly one in five offices in America will be empty in 2022”. Older buildings are particularly vulnerable. “Nearly two-thirds of commercial property in London” is over 20 years old. 

Landlords at the premium end of the market are still feeling optimistic, says George Hammond in the Financial Times. Blue chips regard a swanky office as vital for recruiting top talent. They are still willing to splash out on “high-end finishes and cavernous atriums”. Premium London offices are attracting particularly high levels of investment. Yields as high as 4.2% are more attractive than the 2.75% average office yield available in Paris. Market insiders say the key theme is “bifurcation”: while “modern, flexible spaces” can still hold their own, older spaces are emptying out rapidly.  

A coming crash? 

Office prices in major global cities have so far held up well, says The Economist. That could change when governments withdraw crisis support and companies finalise their post-pandemic office plans. A property crash would pose systemic risks: about one-fifth of US bank lending, or over $2trn, has been made to commercial property. Pension funds are also heavily exposed. As Konrad Putzier reports in The Wall Street Journal, “big global pension funds have been raising their allocations to commercial real estate”. That looks odd, not least because it’s not only offices that face a reckoning. One in two US hotel rooms are unoccupied. Shopping malls are being ditched in favour of buying online. Warehouses, which service that need, are the only bright spot. So what gives? Funds fear inflation more than a price crash. 

Bricks-and-mortar are a time-honoured inflation hedge, says Ben Wright in The Daily Telegraph. But inflation only happens “for those things people actually want”, and office space may no longer be one of them. “Investing in commercial property to protect against inflation may soon look like buying an umbrella ahead of a meteor shower.”

Recommended

3 success stories set for long-term growth
Investments

3 success stories set for long-term growth

A professional investor tells us where he’d put his money. This week: Felix Wintle, manager of the VT Tyndall North American Fund, selects three favou…
24 Mar 2023
Best easy access savings accounts – March 2023
Savings

Best easy access savings accounts – March 2023

Rising interest rates have boosted the returns on instant-access savings accounts. We look at the top rates available on the market now.
23 Mar 2023
The best one-year fixed savings accounts - March 2023
Savings

The best one-year fixed savings accounts - March 2023

Earn over 4% on one-year fixed savings accounts.
23 Mar 2023
5 top UK tech stocks
Investments

5 top UK tech stocks

The UK market has never been considered a fertile hunting ground for tech stars. But there are plenty of promising companies beyond the old economy, s…
23 Mar 2023

Most Popular

Bank of England hikes key interest rate to 4.25%
UK Economy

Bank of England hikes key interest rate to 4.25%

The Bank of England raised rates by 0.25% following a surprise jump in inflation.
23 Mar 2023
Will energy prices go down in 2023?
Personal finance

Will energy prices go down in 2023?

Ofgem’s price cap is now predicted to fall below £2,000, based on average typical use, from July, for the first time since 2022. We have all the detai…
21 Mar 2023
When will interest rates go up?
UK Economy

When will interest rates go up?

The Bank of England raised rates to 4.25%, its 11th consecutive increase. Does the base rate have further to go?
23 Mar 2023