With its open lounges, comfy seating, and coffee- and tech-bars, the new CBRE headquarters in central London could easily be mistakened for a hotel.
Executives are now using phrases like “hotelification” or “earning the commute” to attract back employees who used to work from home in the post-pandemic world of property.
Many bosses are open to hybrid work. Some smaller companies have left behind permanent offices.
Investors fear that a perfect storm is coming to the property sector, with higher borrowing costs and weaker economic growth.
Some City investors worry that the next phase could be worse than the collapse at Silicon Valley Bank and the UBS rescue at Credit Suisse. This is despite the fact that the market is worth $20tn (PS16tn globally) and banks limiting their lending to this sector.
The Bank of England raised the base rate last week to 4.25% in an attempt to control stubbornly high inflation. Meanwhile, the US Federal Reserve raised rates by a quarter of a percentage point to a range of between 4.75% and 5%. This is the highest rate since 2007. The European Central Bank had raised its deposit rate by half an percentage point to 3.3% a week earlier.
JP Morgan Asset Management’s chief executive has warned that shops and offices could be next to go. George Gatch stated on Tuesday that “when the Federal Reserve hits brakes, something goes through your windshield.” “Commercial real property is a concern. How does this affect the real estate market as well as lenders in that area?
According to Remit Consulting data, the Monday-Friday office occupancy rate in the UK was 29% as of 2023. This is slightly lower than the pre-pandemic average of 60%-80%.
According to the most recent Office for National Statistics figures, 40% of UK adults work at home at least once a week, compared with just 12% before the pandemic.
Home work is heavily influenced by Mondays and Fridays. Office occupancy is generally higher in the middle of week.
This does not change companies’ space needs – Simon Brown, head of UK office research at CBRE (owned by the US), says that this is acceptable.
He said that the London central market is closely tied to global trends and economic performance and is therefore more volatile than other UK areas.
It is not surprising, then, that UK commercial property values have been falling against this background. CBRE’s UK monthly Index shows that commercial property values increased in the first half 2022, but then dropped between July and December, wiping away any gains. Property values fell by 13% in the last year.
As investors look for exit options, several property funds, including Blackstone Real Estate Income Trust have had to restrict withdrawals.
In an analyst’s note, Goldman Sachs stated earlier this month that “The recent stress in banking has fuelled growing concern over spillover effects on commercial real estate.”
Matthew Pointon, senior property economist at Capital Economics says that the UK’s commercial real estate (CRE), debt market appears to be in a better place than the US where banks are struggling. “We are still a long way away from the second [great financial crises].”
The British banking system is quite different from the US where large amounts of property loans are arranged by smaller regional banks. He notes that there have not been any UK bank failures and that lenders’ exposure to real-estate debt is very low at 6%. This compares to 12% during the 2008 financial crisis.
Pointon states, “That being said, credit conditions in the UK are set to tighten which will make refinancing harder, especially for offices whose capital values have fallen 15% since 2018, compared with an 11% fall of all property.”
Some warehouse owners may not be able to refinance existing loans due to rising interest rates. They could have to sell their assets.
This could worsen the property slump and slow down the recovery of UK commercial investment, which fell by £1bn from £61bn 2022. According to Savills, the property group that reported a decrease in annual profits this month, it expects the sector will rebound next year due to a shortage of office development supply, and a shift towards sustainable buildings.
According to Nuwan Goonetilleke (head of shareholder assets at Phoenix Group), commercial property prices could fall further by 10% in the UK this year due to a “downward spiral”.
Goonetilleke believes that the outlook for the UK’s commercial property market is closely tied to the rise in interest rates caused by runaway inflation. “If inflation continues its rise, we will see higher base rates and the likelihood of a crash materially increase.”
The unexpected rise in UK inflation to 10.4% during February was surprising, but it is expected that this will fall later in the year. Financial markets predict that the Bank of England’s base rate cycle is close to its peak, which will help ease concerns about the UK’s commercial property market.