But choosing the right offices in the right places is key to double-digit gains a new report shows
As the world began working from home en masse in 2020, there were signs that the pandemic would exacerbate negative pressure on office building assets, already squeezed by flexible working.
But while offices have not seen the demand of fulfilment centres and warehousing – driven by the surge in ecommerce from consumers in lockdown – commercial real estate (CRE) investors can still win with these assets.
A new report from Toronto based investment manager Colliers reveals quality office assets in major metropolitan markets like London, New York, Tokyo, and Sydney have retained their allure and will be in high demand next year.
The firm’s 2022 Global Investor Outlook shows that 6 in 10 investors cite core and core+ office spaces as their top global strategy picks.
Investors acknowledge that offices are here to stay, but with higher construction costs limiting new supply and renovations, quality office assets are viewed as good bets. Survey respondents expect price gains of at least 10% over the next 12 months.
But Tony Horrell, head of Global Capital Markets at Colliers, says that while pent-up demand and delayed transactions will drive momentum in 2022, there are challenges.
“Investors face an increasingly complex and competitive marketplace, coloured by new regulations and COVID-19 uncertainties,” he said. “With the amount of dry powder readily available, offices in Tier 1 cities are seen as safe haven assets that offer an attractive route to deploy capital.”
Industrial and logistics assets are the most attractive CRE asset class overall, with 69% of investors choosing this as the preferred sector globally, due to the surging demand for e-commerce.
ESG matters to CRE investors
The rise of environmental, social, and governance (ESG) elements in investing decisions is clear for those seeking real estate assets.
Colliers’ report shows that three quarters of investors are integrating environmental factors into their strategies as they seek to future proof assets – and meet societal demands.
With newer buildings typically scoring higher for sustainability than older stock that may not be viable to bring up to standards, there will be market turnover driven by recalibration of assets under management.
“COP26 has reinforced that the next 10 years are imperative to the future of our planet,” said Chris Pilgrim, director of Global Capital Markets. “The pandemic, climate-related disruptions, and growing recognition of social inequality are prompting investors to adopt a more robust approach to sustainability-related risks. As the number of ESG regulatory requirements continue to soar, we expect investors will be rushing to sell potential stranded assets to avoid discounted prices later.”
Diversified CRE portfolios
Although prime office space is set for growth, CRE investors are looking at diversified portfolios.
That means that specialized assets such as data centres, life sciences centres, and student housing are among their areas of interest.
“Joint ventures, local partnerships, and M&A strategies are great for savvy investors who want to get ahead. Alternative assets present compelling investment cases, but their unique characteristics make teaming up with the right partner essential. There is a clear need for expertise to fill knowledge gaps and safely guide capital, particularly those in nascent sectors,” said Damian Harrington, head of Global Capital Markets Research.
Among the other CRE assets in investors’ sights are grocery and luxury retail units, shopping centres that are ripe for conversion to logistics or mixed-use, and multifamily housing for rentals.
