What opportunities for office real estate in 2024?
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Each month, LBP AM deciphers market news in video. Today, Christophe Murciani, Head of Real Estate Debt at LBP AM, explains how the evolution of the office real estate market in 2024 represents a major challenge.
In 2023, the European real estate investment market shrank by 54%, against a backdrop of geopolitical tensions and the abrupt tightening of monetary policies to counteract inflation. Against this backdrop, what can we expect in 2024?
While retail, hospitality and logistics assets show clear fundamentals (rising sales in shopping malls, large numbers of tourists for global events, re-industrialization and shortening of supply chains, the rise of e-commerce), office real estate poses a number of analytical challenges.
The industry faces a combination of pricing issues, changes in the way we use offices, excess supply that has built up over the last few years, increased ESG constraints, and finally a limited bank debt supply.
Office property: 5 criteria to watch in 2024
Rates have risen spectacularly, from 2.75% to 4.50% for the best Parisian offices over the course of 18 months. As a result, appraisal values have fallen, a a trend that has gained momentum over the past 12 months.
Office use is also changing, notably due to remote working. Tenants prefer the most central locations, with easy access to public transportation, and for the same budget: they now occupy 15 to 25% less floor space than before the arrival of work from home. Their aim is to cajole their employees back into a pleasant working environment.
The excess supply is illustrated by two figures: since 2015, 44m² of office space has been built in Paris Region per service job created (whereas the norm is around 11m² occupied per workstation), and in northeast Paris, Saint-Ouen/Saint-Denis will offer 600,000m² of new vacant space by the end of 2024, which amounts to nearly six years' worth of take-up.
Sustainability is being imposed both through the tertiary sector decree, and its equivalents in our European neighbors, and through savings regulations via the SFDR directive, which increases work budgets for managers and owners.
Lastly, banks are currently limited by the need to extend or renegotiate transactions secured in 2018 or 2019 on high-volume assets that are currently illiquid. Bank supply will therefore go towards these rather than finance new operations.
Creating the office space of tomorrow
That said, the real estate market is deep enough to keep generating opportunities. We believe that we are on the cusp of a major overhaul of the office real estate space.Office space will be converted into other uses in areas where there is a clear over-supply, or will be upgraded to meet technical, environmental or interior design requirements.
We are convinced that 5-year financing for the transition of existing real estate should offer a very attractive risk/return profile for investors. This type of financing will help create the office space of tomorrow, which will once again attract institutional investors when the macroeconomic environment stabilizes.