European key cities attracting more people back to the office

Vibrant cities are attracting people back to the office, with ESG-compliant buildings in central locations in great demand, delegates heard at Real Asset Media’s Global Outlook 2023 – Key Trends briefing, which took place recently at Nuveen’s headquarters in London.

“In cities like Paris, London, Milan or Madrid people want to go back to the office for many reasons,” said Megan Walters, global head of research, Allianz Real Estate. “We focus on density, because in high-density cities public transport tends to be good and people live in smaller apartments, so there are additional incentives to work in the office.”

Office vacancy rates in Europe are 7% on average, but they are much lower for super-prime assets in city centres in key cities.

“We’re positive on the office market for the right asset in the right location,” said Walters. “Looking ahead, there’ll be fewer new buildings as cities will slow down demolitions because of embedded carbon, so there will be less supply.”

The back-to-the-office trend started in Asia and is not established in Europe, while in the US it has not taken hold yet.

“Office vacancy rates in the US are 19%, much higher than in Europe,” said Walters. “At the moment suburban offices are doing better, but I think that will change. I firmly believe that people will go back to city centre offices in the US as well.”

Already there are huge variations depending on the sector and the state.

“Financial sector tenants are back in the office already in the US and in the Sunbelt cities like Austin, Phoenix and Dallas everyone has gone back,” said Audrey Klein, non-executive board member, chair of ESG committee, SFO Capital Partners. “Flexible offices, in particular, are being used by all kinds of companies, not just start-ups and tech companies as you might expect.”

Transition phase for logistics

Flexibility and repurposing are recurring words in the market now. In Europe some out-of-town offices and business parks that are no longer in demand are being turned into last mile logistics assets.

“Our ideal investment is flexible and transformable,” said Assem El Alami, head of international real estate finance, Berlin Hyp. “We’re still enthusiastic about offices and we are keen on multifamily, but we also like logistics.”

Even the logistics sector, which has been the markets’ darling for a few years, is going through a transition phase and showing signs of a slowdown.

“We’ve seen a fast correction across major markets in the past nine months,” said Sally Bruer, head of EMEA logistics and industrial research, Cushman & Wakefield. “Occupational demand reached its peak in mid-2022 and has been slowing since not due to lack of occupational interest but rather because of a lengthening of the decision-making process.”

Some investors are adopting a wait-and-see attitude, but others see value and are deploying capital. Those who do invest, though, are doing more due diligence. They are cautious and ask a lot of questions because they want to understand the asset and the market before they commit.

Despite the slowdown, rental growth will continue, Bruer said: “The costs of buildings and availability constraints mean that rents will continue to rise, but not at the same pace. Rental growth will also be quite patchy: the tide will not lift all boats.”