Neither rents nor cap rates are particularly moving in the right direction for office owners.
Global office demand could drop by between 10 and 20 percent in the long run as companies continue to grapple with the implications of hybrid work, Barclays analyst Lea Overby told CNBC this week.
The sector has held up so well (relatively speaking) thus far because of overwhelmingly long lease terms. But “if a tenant was deciding to downsize after COVID, really now would be probably the first time they could start thinking about getting out of these leases,” Overby told CNBC.
Noting that “technology has really come a long way” over the last two years, she added that “it makes it quite feasible that companies that want to trim costs, that they may look toward more hybrid working going forward.”
Generally, office tenants in today’s shifting marketplace are looking for high quality properties—think Class A properties in good locations. That includes most of the portfolios of large publicly traded REITs, who also tend to have the cash needed to make upgrades sufficient to entice and retain tenants. Older office buildings and those in less desirable locales, conversely may have a tougher time hanging onto tenants.
“We’re less concerned about the public office REITs than we are more in the one off ownership properties,” Overby said.
And while many still believe CRE is a good inflation hedge, “really that only works when supply and demand dynamics are in balance,” she told CNBC. “For this it would be very difficult for office owners to push rents given the high levels of vacancy that are out there.”
That doesn’t bode well for office investment sales pricing.
“Valuation will depend on both the rent and cap rates. Neither are particularly moving in the right direction for office owners,” she noted. “The best case scenario is that office prices will be flat.”