Successfully completed office property transactions have become a rarity in recent months. The market for core properties in particular has almost come to a standstill.
Office property, until recently “everybodys darling”, was declared a problem case in 2023. The market for core properties in particular has almost come to a standstill due to the surprisingly rapid rise in interest rates. There is sufficient equity available for core properties – from both the institutional and private sectors. However, there is usually a lack of willing sellers who are able or willing to give in to the high yield requirements of potential buyers in the current financing landscape. Because the owners know: The best properties in the right locations will experience rising rents in the coming years, and people are reluctant to part with such assets.
High-quality office buildings will become even more valuable in the future – because they will become a scarce commodity as new projects are rarely initiated. Although demand for space is also likely to fall as a result of home offices or a recession, the limited stock of high-quality, ESG-compliant space in prime locations will not be enough to satisfy demand. This is a great opportunity to position oneself accordingly.
Meanwhile, many existing buildings are at risk of becoming stranded assets – unless they are brought up to ESG standards. However, the cost of this is high and the current rental income is generally not sufficient to carry out an ESG repositioning without a major levy given the current borrowing costs. Office rents are therefore likely to rise in future, not only in the prime segment but also across the board. A favourable window of opportunity is therefore currently opening up for investors with strong equity capital to make acquisitions.
However, not all office locations will have a future: Some office properties will have to find a different use in future. This applies in particular to properties on the periphery of major cities, which are already struggling with long-term vacancies. Converting parts of the space to retail, leisure, catering or residential use could take pressure off the market and improve the location. In addition, neighbourhood developments and an upgrading of the locations and thus the properties through improved infrastructure are seen as key. As stakeholders, local authorities also have a duty to adapt development plans and become part of the repositioning process. And last but not least, many investment managers will continue to professionalise and move away from a strict focus on one asset class. In future, they will work and be trained in a more generalised way.
There is a consensus among market participants that the office will remain an important factor despite working from home and will continue to be needed – albeit with a lower workspace ratio and primarily in better locations. The advantages of an office – identity creation, team building, creative, non-linear exchange, protection of data and business secrets – are currently being clearly demonstrated to many companies.
In Germany, the distortions in the office market that are often observed internationally from the user side are only taking place where one would expect them to – in buildings with unattractive spaces and locations that are difficult to reach.
There will be a market revival in 2024. The interest rate level will be incorporated as the “new normal” under the headline “Higher for Longer” and business plans will be adjusted accordingly. Sales factors in excess of 30 times for absolute premium products cannot be calculated in the current interest rate environment. This will dry up the new construction pipeline for the required ESG-compliant prime space and foreseeably lead to a shortage of Grade A space. Collector’s items, which are generally only traded in dynastic periods, are still subject to their own pricing mechanisms.
Those who recognise this development and invest anti-cyclically will enjoy office investments