Small is good – liquidity lies in lower scale offices

Varied outlook for office sales depending on lot size

June 23, 2023
  • Cameron Ramsey

Investment activity has fallen in recent months, impacted by weak sentiment and uncertain pricing. That’s resulted from what remains a challenging inflation and interest rate environment and uncertain outlook for growth.

Global investment volumes for commercial real estate fell 17% year-on-year in 2022, with Q4 activity notably very subdued. This trend has continued into this year, with first quarter global volumes of US$128 billion a substantial 56% below last year’s level for the same period.

The greatest impact has been felt among larger assets, where the pool of potential buyers is smallest, financing is currently most challenging and transactions most complex.

However, the opposite is true of smaller assets, where a greater diversity of purchasers, including equity-only and private capital create greater competition and greater liquidity.

This is evidenced by the share of smaller lot sizes greatly increasing, with assets in the US$5 millon to US$30 million range accounting for almost half of all investment volumes in the first quarter of this year.

This trend is particularly evident within Europe’s office sector, where performance is polarized in many different ways, including across asset size. The proportion of smaller deals, in this instance those below US$50m, was at 38% in the first quarter of 2023, significantly above the 2022 figure of 20% and the 10-year average of 26%.

In the first quarter of 2023, overall EMEA office transaction volumes were 60% down year-on-year. However, liquidity across different size bands varied substantially. For assets of US$50 million or below, volumes fell by only 25%, compared to a reduction of 69% for deals above this level. The greatest impact was in the largest size band, where no deals of US$500 million or above were recorded during Q1.

Meanwhile, a number of successfully traded deals in the smaller size band took place during the first quarter of the year, including Macquarie and MAPFRE’s long-leasehold acquisition of 8 Old Jewry in the City of London for £40.9 million (US$52 million), sold by JLL on behalf of Orchard Street.

While overall liquidity remains subdued, these trends give confidence that where capital is required, suitable exit options remain for owners of good quality assets – and liquidity can be found in many situations.