These Investors Still Believe In Offices And Are Showing It By Shelling Out Cash
Future demand for offices is one of the biggest questions for commercial real estate and for society at large. It is also clearly vexing property investors.
Office deals made up just 27% of global transaction volumes in the first half of 2021, data from Real Capital Analytics showed, down from 33% in 2020 and 36% in 2019. The slowdown is part of a wider long-term trend: From 2007-2009, in the wake of the financial crisis, offices accounted for 46% of all global real estate transactions. But the fall from 2019 to mid-2021 represents an unprecedented drop of nine percentage points in just 18 months. Clearly, investors are wary of investing in an asset class whose future seems so unclear.
Yet the wariness is not homogenous. In Asia, the decline of offices is not as acute — globally, industrial is now the biggest real estate asset class in terms of deal volume, but that is not the case in Asia.
In the U.S., there is much less fear about the future of suburban office buildings than those located in central business districts. While cap rates for CBD offices have risen slightly since the end of 2019, those for suburban offices have fallen by close to 50 basis points over the same period, RCA data showed.
In short, there is no ubiquitous view on offices among investors — and some have shown they very much believe in the future of the office, investing billions of dollars into the sector. These are the five biggest investors in offices on a global basis, according to RCA data: the ones putting their money where their mouth is.
Who else? Blackstone was always likely to feature on this list because it buys a lot of real estate, period. But the $8.2B it has put into office real estate since March 2020 is a sign it certainly hasn’t turned its back on the sector. As Blackstone co-Head of Real Estate Ken Caplan said during a Bisnow webinar last year, differing opinions on an asset class are what make a market and throw up opportunities. “To us, it's a really interesting investment environment because now you could have a different view on the future path of all these different areas," Caplan said.
When you look at the deals that make up that $8.2B total volume, however, there is a nuance it is worth picking out. A big proportion of the assets bought relate to sectors falling outside typical white-collar professional employment. Within that figure is a $3.4B portfolio of offices attached to lab space in the life sciences sector, a booming area of the economy and real estate. And the office assets Blackstone has acquired in its $3B-plus joint venture with Hudson Pacific comprise space leased specifically to film and content creation companies, another area that is growing for reasons beyond general growth in office employment.
German fund managers have seen huge inflows of money from mom-and-pop investors throughout the pandemic, and Deka put a big chunk of that to work in the office sector — it is the second-largest buyer globally, RCA data showed, having spent $5.3B in the sector. It has not been afraid to pay top prices, either. The £220M it paid for the 63K SF 8 St James’s Square office building in London’s West End in July this year is the highest price per SF ever paid for a London office building. It clearly hearts the UK capital, having spent almost £300M for another pair of office buildings there within the month. In the U.S., it bought 915 Wilshire, a 388K SF building in Los Angeles' financial district, for $196M in December 2020.
Just behind its German peer, insurance company Allianz has bought $5.3B of offices since the beginning of the pandemic. About half the company's portfolio is in offices and it is not shy about buying more. In a roundtable earlier this month, Allianz Real Estate Chief Executive Francois Trausch said that the company is still a big believer in city centres. “We look for well-located, central office buildings right on the transportation node,” he said. “Our investment team in Asia has, in part, concentrated on very visible, central office locations; we recently acquired a 50% participation in one of Singapore’s premium office buildings.
“High ESG compliance is a prominent theme among investors and tenants,” he added. “In all the office assets we acquire, we want to see a clear path to reduce carbon footprint. We also seek properties with a positive tenant experience. Tenants want more amenities and they want more technology in their buildings.”
In terms of large-scale deals, it has forward-funded a €1.4B skyscraper in Frankfurt this year and bought a 75% stake in a portfolio of three London offices valued at £400M.
Canadian giant Brookfield’s chief executive, Bruce Flatt, thinks that offices will remain a fundamental part of the future of work. “In business and life, there are always problems and having a personal connection with others helps you work through those situations,” he said earlier this year. “That’s why office spaces are important.”
Like so many others in the sector, he is clearly talking his own book, with Brookfield maintaining huge office holdings across the world. The firm has spent $5B on offices since the pandemic, and a huge chunk of that is CBD space aimed at financial firms. In the UK earlier this year, it spent £850M on two offices in the City of London financial district in the space of a month. Former Head of European real estate Zach Vaughan told a Bisnow event last autumn that he thought cap rates for offices in big cities would fall as investors chased a dwindling amount of very high-quality assets.
Alexandria is another name on this list that has bought a lot of offices in the past 18 months — $4B worth, RCA data showed. But Alexandria has invested mostly in very particular types of office, namely those associated with its core life sciences business, primarily in Boston and San Francisco. The deal that makes up a big chunk of that total volume was the $1.5B purchase of two office buildings, 401 Park Drive and 201 Brookline Ave., in Boston’s Fenway submarket.