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

Just how green is nuclear power?
Energy

Just how green is nuclear power?

Nuclear power is certainly very clean in terms of carbon emissions, but what about the radioactive waste produced as a byproduct? It’s not as much of …
22 Jan 2022
Why GSK should turn down Unilever’s billions
UK stockmarkets

Why GSK should turn down Unilever’s billions

Unilever has offered GSK £50bn for its consumer division. But while the cash will be a temptation, the deal is not in the interests of shareholders or…
22 Jan 2022
The charts that matter: the start of the big crash?
Global Economy

The charts that matter: the start of the big crash?

US tech stocks fell further this week, more than 10% down on their November high. There’s what happened to the charts that matter most to the global e…
22 Jan 2022
Cryptocurrency roundup: authorities tighten the screw
Bitcoin & crypto

Cryptocurrency roundup: authorities tighten the screw

Saloni Sardana looks at the cryptocurrency stories that caught our eye this week.
21 Jan 2022

Most Popular

Ask for a pay rise – everyone else is
Inflation

Ask for a pay rise – everyone else is

As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why yo…
17 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022
US inflation is at its highest since 1982. Why aren’t markets panicking?
Inflation

US inflation is at its highest since 1982. Why aren’t markets panicking?

US inflation is at 7% – the last time it was this high interest rates were at 14%. But instead of panicking, markets just shrugged. John Stepek explai…
13 Jan 2022