News: Insight & Opinion | 14 March 2022

Time for investors to get back to the office? Commercial property is booming again

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Demand for central London office space is heating up, and occupiers are looking for top quality premises, creating significant opportunities for investors to build up their commercial property portfolios, says Claire Madden, Managing Partner at alternative investment firm, Connection Capital.

No one can deny that it’s been a challenging couple of years for the commercial property market. As Covid-19 lockdowns triggered an overnight shift to working from home, suddenly the lights went out in offices all over the country. Many people wondered whether things would ever be the same again. But despite all the recent gloom, the outlook is looking much brighter for investing in commercial property in 2022. The latest data paints an extremely positive picture, with yields and therefore, values moving in a positive direction across many segments of the market. The time may be right to start thinking again about building up a commercial property portfolio – with a focus on central London offices in particular.

As 2021 drew to a close, demand for office space in the capital was growing strongly, in spite of the looming threat of another lockdown, according to Jones Lang LaSalle (JLL)*. Leasing deals in the West End ended up 2% above the 10 year average, and prime City rents hit their highest ever levels, consistently topping £80 per square foot (source: Riverside Capital). Investment was also extremely strong, with figures from CBRE showing that central London office transactions exceeded £11billion last year - a level not seen since before the pandemic**. Overseas investors clearly see the value here: much of the inflows are international, with those in the US leading the charge, pouring £1bn into London’s offices in the final months of the year alone***. For private investors seeking to broaden the diversification of their portfolios, it’s an attractive landscape.

This momentum is unlikely to run out of steam any time soon. Demand for the right space looks set to outstrip supply, as many businesses encourage staff back to the office, at least on a hybrid working basis. As they do so, employers are seeking to create the most suitable and appealing working environment for their staff, creating even higher demand for certain types of properties with the ideal criteria to meet the requirements of the ‘new normal’.

For private investors seeking to broaden the diversification of their portfolios, it’s an attractive landscape and one that lends itself to capital growth investment strategies as well as income yield.

A better home
It's estimated that between now and 2024, some 25 million square foot of office space will experience lease events (source: Savills). And since around four in 10 of those tenants will have occupied the same space for 10 years or more, for a significant proportion, it will no longer be fit for purpose. The upshot is that those companies will be looking for a new – and better - home.

Tenants today have an updated and demanding wish-list of what they expect from a commercial property. The mantra “location, location, location” still holds and, as ever, occupiers want a design and layout that suits their specific needs and reflects their brand identity. But beyond that, they want more: like outside space, adequate (preferably natural) ventilation and air quality testing facilities. They want leading edge technology and connectivity solutions, for example to allow contactless entry, and to enable businesses to host seamless meetings and collaboration time with customers and staff, wherever they are based.

They want plenty of “breakout” space, but also personal spaces like lockers, where workers can store their belongings when they are in the office. Hybrid workers, for example, may no longer work full-time at the same desk, so have nowhere to store everything, or they may have to transport what they need for each day back and forth. Many occupiers now want fitted offices, and we are seeing plenty of interest for ‘plug and play’ spaces, where they can simply come in and get down to business without the cost and hassle of having to do their own fit-out.

Businesses also have one eye on their ‘green credentials’, mindful that their premises can form a significant element of their carbon footprint. Therefore, properties with better energy ratings and innovations like automatic climate control and smart lighting, and powered by green energy sources, are increasingly sought after.

The opportunity for investors
Central London’s property market, of course, offers investors an opportunity to target yield through rental income but with much of the office stock designed for a ‘pre-pandemic’ world, there’s a real opportunity for capital growth investment strategies too. Investors who are able to secure these kind of properties at attractive prices and then upgrade and customise the buildings for a post-pandemic world, could target even higher returns.

With companies like Google adding to their space in the last year and adapting offices to suit a new era of hybrid working, and employment across the professional, scientific, technology and finance sectors forecast to grow by 6% over the next five years, there’s a strong sense that city centres are returning to life. As that happens, expectations around what businesses – and their workers – want from the office environment has changed. Well-thought out, modernised spaces that can meet those needs should have no shortage of takers. And that’s where savvy investors will be focussing their attention.