Is all Well in the office
The pandemic may have liberated us from the rigid five-day-a-week office schedule, but America’s relentless busy-work culture remains difficult to escape. A recent incident highlights this ongoing struggle: Wells Fargo disclosed that it had fired more than a dozen employees for "simulation of keyboard activity," according to filings to the Financial Industry Regulatory Authority reported by Bloomberg. In essence, these employees were faking work, potentially using a $20 mouse jiggler.
Ashley Herd, founder of management training firm Manager Method, points out, "The sad part is that employees feel the need to purchase and use a mouse jiggler. And that’s a symptom of a much larger problem." She adds, "Managers often assume the worst when they see someone’s away, and so they’re looking for any type of data to show that that’s true. So, team members are going to innovate around that." Research by Professor Sung Soo Kim of Denver University, has shown that employee engagement plummets when employees perceive that their leaders have broken their trust. Indeed, when it became common knowledge in what was to become the sales-tactics scandal, Wells Fargo employees had opened as many as one million accounts without customers’ knowledge, symptomatic perhaps of cultural atrophy.?
Prior to Wells becoming a banking behemoth, it actually began as a provider of regular mail and passenger service, and became the unrivalled leader in transportation in the West Coast when the transcontinental railroad was completed. In the boom-and-bust economy of the 1850s, the company earned a reputation as a trustworthy and reliable business, and its logo—the classic stagecoach—became famous. However after splitting from the freight business in 1905, the banking branch of the company merged with the Nevada National Bank and established its new headquarters in San Francisco where it has been headquartered ever since. One could conclude from the recent scandal a sense of firms decaying workplace cultures and a question on the utility of offices in general. The fall in valuations have been particularly steep in San Francisco where technology companies are more relaxed about working from home. Between March 2019 and March of this year, visits to the office dropped 50% in San Francisco, says location data group Placer.ai. Clearly, offices are in the spotlight.
According to PGIM, the outlook for the office market is hard to generalise. While the overall economic situation is improving, job growth remains subdued. Office utilisation rates are low but improving, especially in larger cities, although the significance of hybrid working varies due to cultural, physical, sectoral, and legal factors. In the United States, CBD vacancy rates have more than doubled, leading to declining rents and adjusting property values, exacerbated by limited liquidity. The ongoing correction in rents and values faces high near-term downside risks. Conversely, some European and Asian CBD office markets are experiencing rental growth. The rise in vacancy rates have been minimal, and there is strong tenant demand in central locations driven by ESG considerations favouring modern, efficient spaces. Cities like Amsterdam and Stockholm are embracing hybrid working, while Milan and Frankfurt show resilience against remote work trends. The focus on ESG among occupiers and owners bolsters demand for premium office spaces.?
According to LGIM, investors should prioritise selecting the right assets within holdings rather than the proportion of holdings compared with peers. They recommend focusing on fully fitted, short-income, and managed options to complement an offering of traditional leases, although investors need to be comfortable with a shorter and more volatile income profile. Management agreements, which generally carry a lower risk of binary default, offer opportunities for higher risk-adjusted returns compared to traditional leasing. However, this strategy may not appeal universally, particularly to investors preferring less-intensive structures in other sectors. LGIM Real Assets began the period underweight in offices and anticipates maintaining this stance. While highlighting opportunities in specific office styles may appear contradictory, it aligns with anticipated market polarisation.
According to AEW, contrary to prevailing expectations prime offices are projected to yield the highest returns of any sector, at 9.6% per annum over the next five years. This reflects significant repricing in 2023 and Q1 2024. Across all 196 sectors covered, projected returns for 2024-28 slightly decreased to 8.8% per annum. The latest forecast indicates prime rental growth of 2.1% per annum for 2024-28. Logistics and residential sectors maintain their leading positions with 2.5% per annum growth. The INREV Asset Level Index indicates offices have the highest vacancy rate at 9%, excluding assets under redevelopment. This marks the largest and most sustained increase in vacancy since the Covid pandemic, compared to a 5% vacancy rate at the end of 2019 before Covid. Notably, office vacancy was nearly 12% in 2014.
领英推荐
This downturn has significantly diverged real estate performance. Since June 2022, residential property values, including student accommodation and retirement living, have fallen by less than 5%, whereas regional office values have dropped by a third, according to Savills. Few investors foresee a halt to declining values in secondary offices. Flexible working and upcoming environmental regulations requiring energy performance certificates of "B" or above by 2030 have rendered many offices obsolete, making upgrades economically impractical. Regional REIT, mainly investing outside the M25 in offices, faces challenges. The company is aiming to raise ￡75m in a heavily discounted equity issue to repay a ￡50m bond due in August, trading its shares at a 61% discount to asset value.
Nick Leslau believes current market opportunities are limited. Post-financial crisis, real estate attracted little capital, enabling inexpensive acquisitions with clear financial futures. Today, however, he observes logistics and offices are 15% more expensive than six months ago, indicating prime opportunities have likely been seized. According to Barings, downward price pressures are easing, with prime All-Property yields stabilising. Investor conditions are improving, evidenced by property bond spreads widening to 290 basis points and early signs of relaxed credit conditions. Property pricing recovery will vary by geography and sector, influenced by refinancing gaps in real estate debt and long-term growth drivers.
Cushman & Wakefield reports that physical office occupancy is showing encouraging signs. According to a PayScale survey, return-to-office mandates aim to foster collaboration and maintain corporate culture, cited by 74% of respondents. Physical offices remain crucial for attracting talent and building culture, bolstering demand for prime office spaces amidst a shift towards sustainability. However, shortages in modern office stock mean much needed new inventory has yet to be developed. Despite predictions for a 2023 cyclical peak in office developments, only 3.8m square meters were completed, representing 1.5% of total office stock. Inflation-related cost pressures and a softening economic environment likely delayed several projects to 2024. This year, an increase in completions is anticipated, reaching 2.2% of total stock, still below the 2.2% annual replacement rate, assuming a 40-year building lifespan. Given the flight to quality, the impact on total vacancy from rising development is likely to be modest. The scarcity of modern spaces largely explains why European prime office rental growth remained strong at 6.1% annually through March 2024.
To pursue "compelling new investment opportunities" amid a commercial property market reaching its nadir, London office developer Great Portland Estates intends to raise ￡350m through a fully underwritten rights issue. Chief Executive Toby Courtauld, known for strategic acquisitions post-2008 financial crisis, said: "At GPE, we've always taken a very countercyclical approach. We have a track record of understanding the cycle." GPE's vacancy rate has dropped to 1.3%, down from 2.5% last year, driven by robust demand for new office spaces, particularly in London's West End.. Courtauld noted: "We've seen asset values correct over the past 18 months, with central London commercial real estate now trading at levels last seen in 2009 in real terms."
The recent sluggish market and outsourcing trends, threatens the career paths of aspiring CRE professionals. Entry-level jobs in commercial real estate have steadily declined over the past two years, intensifying challenges for young adults aspiring to careers in CRE. This trend jeopardises their ability to gain crucial skills needed for senior roles. According to SelectLeaders, positions requiring zero to four years of experience dropped by 26% year-over-year as of May, with a further 35% decline from May 2022 to 2023.?
McKinsey's analysis underscores significant shifts in labour demand driven by AI and automation in Europe and the United States. By 2030, up to 30% of current work hours could be automated, impacting roles like office workers and production staff while increasing demand for STEM and healthcare professions. McKinsey projects around 12m occupational transitions in Europe and the US by 2030, highlighting the need for businesses to upgrade skills, particularly in technology, critical thinking, and creativity. However, lower-wage workers may face challenges in transitioning to higher-paying roles, potentially widening labour market disparities. Meanwhile, tech companies have reported over 89,000 job cuts this year, surpassing 263,180 in 2023. This poses challenges for computer science graduates aiming for tech careers, though opportunities remain in sectors like finance and healthcare. The adoption of generative AI is set to reshape coding tasks, yet skilled coders will remain essential to oversee and correct AI outputs. The advent of AI also revitalises interest in liberal arts education, emphasising the need for professionals adept at communication and creative problem-solving in guiding AI systems.
The 5:2 diet, advocated by the recently departed Dr Michael Mosley, promotes intermittent fasting to enhance health and weight management. Similarly, the office market must now consider shrinking and adapting to meet evolving economic and technological shifts. However like LGIM, investors should prioritise asset selection rather than its proportion of total holdings. The office sector needs strategic realignment to succeed amidst changing work patterns and requirements. Both approaches highlight the necessity for flexibility, adaptation, and proactive measures to achieve sustainable outcomes, whether in health or business contexts. The 5:2 diet advocates occasional restraint, for long-term benefits.