Ever since the start of the pandemic and the rise of the work-from-home movement, investors have pondered the future of the office asset class.

Olga Koroleva

Olga Koroleva

Green Street, for instance, has projected a decline in office demand. However, demand continues to be strong for first-rate space (eg first-class office rents in central Paris climbed to €950/sq m). At the same time, older buildings that were under-invested felt the pain of the transformational shift in tenants’ needs.

In short, calls for the death of the asset class are greatly exaggerated, but there is a paradigm shift in what the office of the future means, which implies new challenges and opportunities for investors as well as for asset managers of investment funds.

Office investment challenges and hints

The first challenge is the office concept shift. Forward-thinking companies implemented the Activity-Based Workspace (ABW) concept three to five years ago, while other companies are now catching up. ABW involves repurposing the office space to provide employees with the tools and spaces to make the most of their working time.

Although difficult, such projects provide long-term sustainability. Investors might want to pay attention to the existing office layout and be conservative when estimating how quickly it can be altered. Then assess investment volumes sensibly.

Another challenge is building new offices or renovating existing ones to meet ESG principles. It is timely and costly and there are no common ESG standards for real estate. However, it may be easier to do so for prime offices as landlords have focused on the issue for some time. Investments in this sector will become more promising and the parties that make a step into this market before it grows saturated with ESG-friendly offices will benefit the most.

Given how fast things can move, investors should always be prepared to put in more funds and be conservative when estimating the costs needed to upgrade the facility to meet modern ESG standards. Usually, investors need help from AIFM and RE fund asset managers, as the typical technical due diligence will not provide an adequate answer.

Finally, the real estate market moves slowly. Most landlords have not adjusted to the new demands while large corporations cannot break existing lease contracts due to their strategic planning for three to six years. However, additional investment can help accelerate this process, and investors should work with developers who have the capability and intention to do so.

In the next two years, companies will likely take advantage of lease break options and/or downsize the leased spaces and move to higher-class offices to meet the increased expectations of employees.

At the early stages of the next upcycle

Despite the new demands of the real estate market that emerged in 2022, it has the potential to grow in the next few years due to increased inflation. Asset managers expect an increase in the inflow of investment in office real estate by 13% to 14% in the second half of 2022.

The sector will continue its post-pandemic recovery and benefit from investor flows that are looking for both an inflation hedge and a steady source of income amid global macro uncertainty. In a couple of years, there is a high chance of rapid office construction that will meet the current social requirements, creating market stability and attracting new investors.

Olga Koroleva is head of real estate asset management at UFG Capital