Our Opinion: 2021

Commercial property values at risk

Many companies are planning to adopt a “hybrid” working model once the pandemic is over, with weeks split between days in the office and days working from home. That means they will require less floorspace than before.

A survey of Britain’s 258 biggest firms by PwC found that half have plans to cut the size of their property portfolios. Planned reductions amount to nine million sq ft of space. That’s equivalent to 14 London skyscrapers-worth of floorspace that nobody wants.

Globally, more than 103 million square feet of office space has already been vacated since the pandemic began. Moody’s Analytics thinks “roughly one in five offices in America will be empty in 2022”. Older buildings are particularly vulnerable. Nearly two-thirds of commercial property in London is over 20 years old.

Landlords at the premium end of the market are still feeling optimistic. Blue chips regard a swanky office as vital for recruiting top talent. They are still willing to splash out on high-end finishes and impressive atriums. Premium London offices are attracting particularly high levels of investment. Yields as high as 4.2% are more attractive than the 2.75% average office yield available in Paris.

Office prices in major global cities have so far held up well. That could change when governments withdraw crisis support and companies finalise their post-pandemic office plans. A property crash would pose systemic risks: about 20% of US bank lending, or over $2trn, has been made to commercial property. Pension funds are heavily exposed. The big global pension funds have been raising their allocations to commercial real estate.

That looks odd, not least because it’s not only offices that face a reckoning. One in two US hotel rooms are unoccupied. Shopping malls are being ditched in favour of buying online. Warehouses, which service that need, are the only bright spot. So what gives? Funds fear inflation more than a price crash.

Bricks-and-mortar are a time-honoured inflation hedge. But inflation only happens to those things people actually want, and office space may no longer be one of them. As Ben Wright recently reported in The Daily Telegraph “Investing in commercial property to protect against inflation may soon look like buying an umbrella ahead of a meteor shower.”

14th June 2021