Jury out on office and retail as economic uncertainty persists
The jury’s out on prospects for the office and retail sectors in the current transition phase out of the pandemic and through macroeconomic challenges, experts agreed at Real Asset Media’s European Real Estate: Outlook & Opportunities briefing, which was held recently at Nuveen’s offices in London and online.
“Best and the rest is a good summing up of the office market,” said David Inskip, head of UK strategy and research, CBRE Investment Management. “It’s clear that offices need to be high quality to encourage people back after the pandemic and they need to be ESG-compliant.”
Quality matters in this transition phase, as the new hybrid working structure is still being defined and people are getting used to it.
“Offices are still part of our core activity,” said Assem El Alami, head of international real estate finance, Berlin Hyp. “We continue to see the appeal of a professional living space that takes ESG and well-being into account. To us the equation is clear: a positive environment determines productivity.”
Berlin Hyp is walking the walk as well as talking the talk: the bank is building its new headquarters and using those concepts to provide adaptable office space and create a good environment that is conducive to productivity as well as well-being.
“Prime rental growth in the office sector is relatively muted, but there are risks in 2023 as economies weaken or contract,” said Stefan Wundrak, head of European research real estate, Nuveen. “However, even if there is a recession conditions are very different from the last one, because there has been no massive overbuilding this time round.”
Offices are likely to change with more meeting spaces and new lay-outs, but experts agree that they will still attract employees and capital.
“We are likely to need less office space in aggregate but we’ll need more space per person and also different spaces for different purposes,” said Inskip. “It may not offset the transition to home working, but I think offices will still be full on Wednesdays even if they may be empty on Fridays.”
Retail is another sector with a question mark hanging over it, which has seen its fortunes change in the last few months.
“There was a lot of optimism about retail at the beginning of the year but the cost of living squeeze has put the sector on the back foot,” said Inskip. “There are still opportunities to be found, but there’s a difficult period ahead for occupiers.”
In January there were high hopes of a post-pandemic retail recovery, with the savings cushion driving consumer spend and economic performance, an increasingly stable occupier base through rebased rents and expectations of high income returns.
“But six months later we’ve seen a consumer confidence collapse in the face of high inflation and the cost of living crisis,” said Wundrak. “A consumer-led recession clearly is not positive for retail, but on the other hand higher interest rates have less of an impact on the sector, which makes retail more investable, especially retail warehousing.”
Prospects vary according to the country and its specific conditions and shopping habits.
“We look at retail on a case by case basis, country by country, segment by segment, asset by asset,” said El Alami. “For example, luxury retail in Paris works very well. In Poland there is no high street in the centre of town so people flock to shopping centres. Cultural differences do play a part.”