Predicting the performance of any asset class is always a challenge, not least for offices, given recent market conditions. However, there’s potential for improvement in office real estate investment in the coming months.

There’s still much that could disrupt this narrative. But a broadly improving macro environment is pointing the way for a cautious return to growth. Here are five key themes to look out for in 2024.

Cautious confidence

Resilient occupational dynamics are bringing more confidence to underwriting, particularly through sustained prime rental growth, which averaged a strong 4.6% across Europe last year, including 6% in Berlin, 7% in Amsterdam and almost 10% in the City of London.

Part of this lies firmly in the return to the office: Many businesses still value the collaboration that comes from the office environment. The discussion on hybrid working patterns is beginning to settle, with many employers and employees finding a reasonable balance and companies more confident in their space needs, resulting in high levels of active demand.

With cities remaining the centre of economic activity and the home of talent, good offices in prime, urban locations are still highly desirable.

Unequal pace of recovery

All this said, the trajectory is not uniform. While some markets will recover soon, others are likely to remain subdued for a little longer.

The UK has moved through the cycle most efficiently, most notably in London’s City district where yield shifts have reached 200 bps, pushing pricing out considerably further than in many other major markets. This is bringing a broad investor pool back into play.

At the other end of the spectrum is Germany, where the office sector was highly exposed to the easy cheap-money trade of the past decade, driving yields to record lows, and as such the recovery may be more drawn-out.

Return of private equity

There’s evidence of an increase in bidders and buyers from investors previously very much focused elsewhere. In London, JLL have identified around £2.5 billion (€3bn) of private equity bids made on recent opportunities, while a private equity buyer was behind a large high-profile purchase in the West End, the estimated £340 million (€400m) Lotus portfolio.

And some of these bids have been for assets much more core than would typically be expected of these buyers, with the financials stacking up to offer potentially very attractive returns from theoretically lower risk investments.

Investment to slowly pick up

Increases in investment will be gradual and incremental and will take time to show in the statistics, especially given the limited overhang from 2023.

So far, we’ve seen strong conviction among investors for fully let, top of the tree, prime offices, as well as for immediate development opportunities to create these. But there are early signs that investors will this year begin to look at core-plus offices, where many buildings are fundamentally sound, some good income remains, and capital expenditure requirements are not immediate given their lack of imminent lease expirations.

With prices now reaching new, more stable levels, interest rates moderating, and bid-offer spreads narrowing, we see sentiment slowly improving and glimmers of optimism returning. Further into 2024, we expect investment to pick up as this sentiment translates into activity.

Debt in the spotlight

High volumes of refinancings, as explained here, will create both pressure and opportunities.​ While many view this as a significant risk, this is balanced with the potential for increased liquidity and evidence of price points. A recent UK investor survey by JLL saw an almost equal share of responses highlighting both the risk (45%) and the opportunity (43%).

Meanwhile, a recent bond market rally, combined with those price corrections, has opened up yield spreads once more. This makes debt more viable and begins to make the numbers stack up for office real estate to work again.

It’s still early days and caution remains, but the worst of the negativity from 2023 now appears to be behind us, with the focus turning to potential opportunities, sensible management of risk, and possibly even a first-mover advantage.