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The rise of remote working is transforming office markets, but not in the way investors might have expected.
During the coronavirus pandemic, stark images of desolate city centres prompted warnings of a hollowing out, with traditional business districts empty while employees worked from home or from smaller local satellite offices. Five years on, the opposite is happening in cities like London: demand for prime central offices is surging, while those on the outskirts — or even just the slightly off-centre — are struggling.
If companies are battling to lure staff into the office, it helps to make that office as convenient and attractive as possible — hence Great Portland Estates, for example, keeping more than 90 per cent of its portfolio within walking distance of London’s Elizabeth line.
The most high-profile illustration of the trend has been the stream of recent headlines about major companies abandoning Canary Wharf for the City of London. But it is not just a British phenomenon. Blackstone, the private equity group that owns €120bn worth of European real estate, says there are similar patterns across the continent.
On average, rents in European central business districts have grown at more than twice the pace of non-CBDs over the past five years, according to Savills. In Milan, vacancy rates in the central business district were just 2.4 per cent in the first quarter, according to CBRE, compared with 11 per cent for the rest of the city.
In Finland, Blackstone-owned Sponda reports a growing number of companies looking to relocate from the outskirts of Helsinki to the centre, a phenomenon that has helped drive prime rents up 14 per cent over the past year.
Other investors are taking notice. The few commercial property deals that are getting done in the high interest rate environment are focused on major city centres. There were €26bn worth of office sales, financing or recapitalisations in European central business districts in the 12 months to March, according to MSCI data, up 25 per cent year on year. Outside of central business districts, in contrast, volumes fell 10 per cent to €20bn.
Given the lack of new construction and the preponderance of long-term holders in many historic cities, the supply of quality buildings is likely to remain limited. That suggests rents can keep rising, and strengthens the argument that many listed property groups are undervalued.
GPE trades at a 30 per cent discount to its book value despite focusing on precisely the sorts of buildings that are seeing the highest demand. Many of its peers around the UK and mainland Europe are trading at similar levels, like Derwent and Helical in the UK, or Covivio in France and Inmobiliaria Colonial in Spain.
As workers go hybrid, so should investors — by sticking to those office properties that are best suited to a city-centre revival. An all-in bet on office real estate would be a high-risk move, because not all property companies are going to rebound. But that doesn’t mean the whole industry needs a refurb.
