U.S. Part 1- Are We Past the Bulk of U.S. Value Declines?
The decline in U.S. property values has further to run, but due to a combination of investor discipline and more than a little luck, the bottom is in sight.
Asia Pacific Part 2 - Will Rising Flexible Working Drive Further Polarization in the Office Sector?
Aug 29, 2023
10 mins
The rise of flexible working and its long-term impact on the value of office space remains a critical topic for real estate investors across global markets. Whilst most markets report a recovery in utilization rates, office attendance in major cities in China, Japan and South Korea is still only back to around 80-90%1of the pre-pandemic level.
All signs point to this being a new normal –that flexible working will remain much more prevalent going forward than before the pandemic –but such prevalence will continue to vary across markets (see Exhibit 2, left chart). In itself, this points to a more varied outlook across office markets, but this outlook is compounded by the fact that despite lower utilization rates, over the same period, the total stock of occupied office space is now higher than it was in 2019.
Exhibit 2: Rise of Flexible Working Doesn’t Lead to Widespread Declines of Occupied Space
Together these help explain not only the divergence in office market performance across the region but also within cities. While overall demand for office space is growing, it is not growing at the same pace or even direction everywhere (Exhibit 2, right chart). Moreover, with utilization rates now lower, occupiers are upgrading to Grade A space in CBDs, albeit with smaller floorspace.
What does this mean for the rental outlook? The implication is that with local demand-supply dynamics to one side, Grade A office rents will significantly outpace poorer-quality, poorer-located stock as space demand becomes more concentrated. This is because firms are able to afford higher rents from a per-square-meter perspective simply by reducing their floorspace demand. In other words, a smaller floorspace means a higher worker per-square-meter density, which in turn means higher output per square meter, and therefore higher rental affordability (Exhibit 3).
This pattern is set to be an ongoing feature of major office markets for the next few quarters, further driving a divergence in rental prospects across office asset quality and submarkets (Exhibit 4).
Exhibit 3: Sharp Declines in Office Space per Employee Are a Boost to Office Productivity in the Post-Pandemic Period
Note: *Major CBD office markets in Australia, Hong Kong, Japan and Singapore, measured by occupied office space per employee for major office-using industry.
Note: *Office productivity is measured by the ratio of GDP of office-using industries including financial and business services; technology, media and telecommunication; and other services sectors and total occupied office space.
Exhibit 4: Widening Polarization of Office Demand and Rental Growth Prospects Across Grades and Submarkets
*Major CBD office markets in Australia and Japan
1Source: CBRE.
More Insights
Europe Part 1 - Falling Values: What Role are High Debt Costs Playing?
Real estate transaction volume in real terms has fallen to levels last seen during the Global Financial Crisis (GFC) when investment volume deteriorated.
