Office investment at decade low but data points upwards


End to rate rise cycle, return-to-office strategies and improvement in leasing activity prove key

August 04, 2023
  • Cameron Ramsey

Ongoing inflationary pressure, further interest rate rises, and structural shifts in work patterns have prolonged a slowdown in office investment across European and global markets.

European office investment in H1 2023 was €18.6bn, down 62% from the first half of 2022 and less than half of the five-year average as all markets saw a significant decline in investment. Of the region’s largest three countries, Germany saw the biggest decline in H1 2023 (-67% year-on-year), followed by the UK (-61%), and France (-44%). Across other regions, CEE was down 75%, Benelux -72%, the Nordics -72% and Southern Europe -63%.

This comes against a backdrop of falling wider investment volumes, which reached €66.8bn across all sectors in EMEA in the first half of 2023, a decline of 54% from the same period last year.

For the office sector, the trend has been exacerbated by weak global sentiment as post-pandemic structural shifts take place in the way companies and individuals work.

At the same time, significant pressure has come from rapidly rising and volatile financing costs, creating uncertain pricing dynamics. While the economic environment still feels challenging, the worst of this pressure is slowly beginning to ease. Inflation is now falling materially across most global markets.

In the eurozone, HICP growth for the 12 months to June fell to 5.5% from 6.1% in May. In the UK, CPI growth for the 12 months to June fell to 7.9% from 8.7% in May.

As a result, central banks are now thought to be approaching the conclusion of the tightening cycle, despite recent interest rate rises by the Fed, ECB and Bank of England. More stable interest rates will increase visibility and confidence in underwriting, which should in turn improve market sentiment and increase transactional activity. While the timelines for this process have moved out a little in recent months, the trajectory and ultimate outcomes are consistent.

Meanwhile, the epicentre for negative global sentiment on offices has been the U.S., where hybrid working trends have been most entrenched and office occupancy most reduced. Encouraging Q2 data suggests this tide is starting to turn, with leasing activity up by 10% quarter-on-quarter following four consecutive quarters of decline, slowing levels of subletting.

Increased momentum in corporate return-to-office strategies is beginning to improve attendance and occupancy. U.S. office occupancy has risen above 50%, according to Kastle’s 10-city Back to Work Barometer, with both Chicago and Los Angeles reaching post-pandemic record highs.

While European leasing momentum continues to slow, requirements however, are healthy, suggesting this too will reverse in the coming months. Prime rental growth is strong, with the European index up 1.5% in Q2 and up 6.3% over the last 12 months, comfortably above the 10-year averages of 0.9% and 3.4% respectively.

Combined with greater stability and predictability in the economy and improving sentiment globally, we are confident that the current low levels of investment will be relatively short-lived, and office investment activity will pick up as we move towards 2024 and beyond.