Having been back from EXPO Real for a couple of weeks now, I have had a chance to reflect on the experience. On the one hand it was fantastic to be there again after a 3-year absence (I skipped last year and we all know what happened the year before!). Over 40,000 real estate professionals from across the globe, all wanting to understand what everyone else was thinking about the current market environment. On the other hand, it was a strange experience, because the overriding feedback from clients was that they were in ‘wait and see’ mode. Normally, EXPO is full of people talking specific deals and opportunities; this time it was very much about understanding the sentiment.
Across Europe, the simple mechanics of a deal have changed beyond recognition because of the scale and speed of the increase in borrowing costs. Even unleveraged buyers expect this to be reflected in a change in the pricing they pay while the debt-backed have no choice but to react. Since we emerged from the pandemic, deals were relatively easy to make, but that period is now past. So, whilst there are still transactions taking place, the fundamentals have got to be absolutely right, and normally that means extra scrutiny on it being the right asset and the right occupier.
While no one saw the speed with which interest rates have changed, the fact that they would increase was very predictable - it was just a question of when. So far, we have still only brought forward an increase that was within predicted ranges - and hence should be something smart investors had a strategy prepared for. However, inflation is the fly in the ointment - strategies didn’t assume higher rates and higher inflation. If inflation is sustained even at 5%+ rates then interest rates won’t just adjust early, and they will remain at painfully higher levels.
One of the correcting mechanisms in the market should be a fall in return expectations - people were being rewarded too highly for taking too little risk. This uncertainty is holding back investors and lenders - but we do have debt and equity providers that are “motivated” (e.g., they get paid to allocate) to get into the market and we also have more stock coming to market - and it is beginning to be at a more realistic asking price. The upshot is, therefore, that markets are reacting and repricing much quicker than most would expect.
Once again, though, the market will become even more polarised - it will be the best in all sectors that will remain stable or even up in rental terms, given the demand from occupiers for modern, effective, ESG compliant space.
Investors have paused to take stock of the multiple factors which have arisen since the start of the year, in particular the war in the Ukraine, accelerating inflation, earlier than expected interest rate rises, and the return to the office and ‘normality’ after the pandemic. However, while market conditions have quietened somewhat from a very busy start to the year, it is too early to determine if this signals an end or just a pause in the market’s post-Covid recovery.
Most economic forecasters suggest the worst of the current situation could be behind us in Q3, with GDP and inflation returning to previously expected levels by the end of 2023. The margin of error on these forecasts has, however, increased and interest rate hikes are not expected to reverse unless the economy does slip into recession. Hence, at the very least, we have moved away from the ultra-cheap money environment of recent years.
This, on its own, should be enough to trigger an adjustment in strategy and pricing. It has not stopped the market in its tracks - deals are continuing, and buyers remain keen to find the right opportunities. What has changed is the selectivity applied to determining what is the ‘right’ asset and a greater nervousness over taking development risks given the escalating cost of construction.
That said, conviction plays such as Logistics, Living and Life Sciences continue to attract new capital and keen pricing and bidding - just with more focus on underwriting growth potential and in some cases a thinner queue of buyers. In other sectors, an adjustment in pricing has been seen or is expected, reflecting the increased cost of debt as well as uncertainty over value. This is typically running between 5% and 10%. However, for quality real estate in all sectors, modern supply is limited, and new development will be held back, putting future pressure on rents.
So, while it is true that the froth has been blown away from the market, dry powder remains at exceptionally high levels, alternative investment segments are facing similar or greater risks and interest rates are still low by historic standards. As a result, assuming current economic forecasts are largely correct, as we see more clarity emerging over the summer, a pick-up of activity is likely, just with a more focussed investment strategy. And, more positively, that adjustment in strategy and peaking in pricing should clearly signal a time to sell for some, leading to more stock coming to market and more activity in what could yet be a busy end to the year.
If there is one sector that has been thrust into the spotlight more than any other over the last year, it is logistics. Our 2021 Global
Logistics Outlook report looks at some of the key drivers for both the investment and leasing markets across the globe and also specifically for EMEA. Download your copy here.
One of the attractions to this sector is the longer-term growth factor due to the continued expansion of the global middle class - due to double over the next decade. This increased level of consumption, along with the accelerated shift towards e-commerce, is going to drive the requirement for businesses to have stronger, more resilient and more diverse supply chains. Combined with a shortage of labour in some markets, plus the sharper focus on ESG priorities, this will mean an accelerated adoption of technology. In addition, there will be a continued growth in third party logistics providers which will help to drive demand in the sector.
At the same time, Europe’s logistics sector is grappling with supply constraints, stemming from a combination of a lack of developable land and strict planning regimes in many countries. Along with low vacancy levels going into the pandemic, the resultant pause in speculative development now means that there is a growing supply-demand gap. Consequently, rents are under upward pressure; for example, London saw 12.5% annual growth and Germany’s average growth was 5.6%.
These near-term factors are combining with the longer-term structural trends to mean that investors are seeing strong capital and income returns. This will only result in an increase in the capital coming into the sector during 2021.
Every quarter we undertake a survey of Cushman & Wakefield Capital Markets advisors across Europe in order to take the sentiment of the investment market. In our latest indicator, sentiment across the region has improved notably thanks to gains in all categories, but most notably in demand and transactional activity. Sentiment towards pricing also rose but still remains negative, although it is important to note that this is driven by weaker views on secondary markets and on potential rent reductions, more than it is by yields.
In terms of geography, modest improvements were seen in 12 of the 19 tracked markets while none saw a decline - Sweden was the most positive ahead of Germany. Sentiment improved the most in The Netherlands, Finland and Germany. The relative standing of the sectors was unchanged, with logistics and residential out in front, but all sectors saw an improvement, most notably hospitality.
Other indicators also show a contrasting picture. Q1 saw a 33% fall in investment volumes on the same period of 2020, making it the weakest opening quarter since 2014. However, trends were far from uniform with The Netherlands, Sweden, Poland and Germany seeing notable falls, but Denmark made gains while the UK was up slightly, and Spain and France were more resilient than most. In addition, GDP forecasts for Europe have polarised further in the first quarter of this year, with the UK outlook improving but the Eurozone seeing some growth deferred to 2022.
One of the interesting factors at play is, of course, the opening up of economies, which is different for each country. The question will be how this will impact the full return of the markets in all sectors, particularly for international investment. In the offices sector in London, we are already seeing some signs of a pick-up in activity, which is ahead of other cities in coming out of the latest (hopefully last?!) lockdown. This is still to translate into a significant increase in deal closures, but the signs are there. The expectation is that other markets will follow this rebound in activity in what is the largest investment sector across Europe. We are therefore anticipating a significantly greater volume of activity in the second half of 2021.
When I first entered the industry 30 years ago, the ‘un-sexy’ sector to get involved in was industrial. Whether you were a developer, investor or a ‘shed’ agent, it was less glamour and more grit – a mainly male-dominated industry with a close group of protagonists who all knew each other well.
Fast forward to 2021, and logistics (the new name) is the flavour of the decade – huge amounts of capital are allocated to investing in a sector that is seen as the place to be, driven by the global shift towards e-commerce and the impact this has on the supply chain. Perhaps I should have chosen industrial rather than offices!
This is not just a passing phase. The European logistics sector has shown more resilience to downturns such as the GFC and, latterly, during the coronavirus pandemic. This has deepened the investor pool with most investors seeking to increase their exposure to the sector or get involved for the first time. And this at a time when the development cycle has meant a tightening of the pipeline, and as such pricing has undergone a seismic shift – yields have compressed to around 3.5% in core markets, with some assets attracting sub-3% in certain UK and German markets.
But despite the wall of money coming into logistics, investors must continue to examine the real estate fundamentals. Of particular note are factors such as resilience and obsolescence, covered in 'What drives resilience and obsolescence in logistics real estate?' by our EMEA Head of Logistics & Industrial Research, Lisa Graham.
In the meantime, our teams across EMEA are primed to help our major investor clients secure stock over the next 12 months. This has been the one sector where single asset transaction volumes and platform plays have continued despite the pandemic. We see this activity accelerating as the European market opens up from the latest series of lockdowns.
As the weather improves, so too does property investor sentiment.
During the first week of the quarter, lockdowns were in place across many countries in Europe and the vaccine roll out had not yet started within the EU. As we enter the last week of the quarter, I am happy to say that investment sentiment has improved dramatically over the course of the past 3 months and indications are strong with regards to the rest of the year.
The vaccine roll out has gone well in Israel, UAE and the UK and the EU will swiftly catch up as vaccine availability increases and the logistics of delivery are addressed. The vaccine, in combination with the effectiveness of lockdowns and the arrival of warmer weather, has seen the number of cases and serious illness decline rapidly since the beginning of the year. Globally, according to John Hopkins University, an average of 14,000 people globally were dying each day as we entered the quarter, this has almost halved to around 8,000 per day over the course of the past week.
The Bank of England’s Chief Economist says ‘I do think, more likely than not, we are set for a rapid-fire recovery. That is coming, and I think it’s coming soon’. The ECB has said ‘real GDP to exceed pre-crisis level by Q2 2022, one quarter earlier than projected’. The IMF and the Federal Reserve are all improving or upgrading their forecasts and sentiment for the remainder of 2021 and into 2022. Improvements in views towards transactions and debt saw overall sentiment improve in the Cushman & Wakefield indicator series during the past month.
As might be expected, the relative standing of property sectors remains unchanged with logistics and residential out in front, although retail and office both saw an improvement. Business and consumer confidence improved as a more optimistic view of the future becomes apparent. Financial markets are similarly positioned with equities at an all-time high and already 7%+ higher than the beginning of the year. Bond yields have stabilised at higher levels, as some of the fear has been taken out of the market to be replaced by optimism.
Q2 will see an increase in activity as we experience decision making as opposed to planning, and preparation takes centre stage at many virtual board tables.
Last week we published The Signal Report: Global Guide to CRE Investing in 2021. This builds on our market-leading thought leadership series New Perspective: From Pandemic to Performance and is a guide to help commercial real estate investors navigate the recovery through this year.
The key Capital Markets trends that the report covers are:
- Q1 has been a difficult quarter, but there is consensus that vaccines will be widely distributed by mid-2021 in most economically developed countries. As a result, economic outlooks have been revised upward and many expect an activity surge in the second half of 2021.
- As uncertainty gradually declines, multiple factors support a robust recovery in the capital markets: supportive fiscal policy and interest rate environment, high capital availability for debt and equity, and attractive valuations relative to other asset classes.
- Investors remain relatively risk adverse, focusing on core markets and long-term growth stories, particularly “beds, sheds, and meds.”
- Industrial & logistics and alternatives have been continuously well-bid. Office liquidity is expected to turn the corner in the second half of 2021. The hotel and experiential retail sectors will begin to improve, though from a low base.
- Institutional core funds, private equity funds, and private capital will continue to drive the market with mounting confidence. Global volumes are expected to finish the year down only 15% from 2019 levels.
- Investors will focus on improving their portfolio’s ESG profiles as they transition to a post-pandemic market.
- Interest rates will remain low as central banks support recovery. This will stimulate property demand and pricing globally.
These trends will be influenced by major occupier trends, including:
- The industrial outlook remains strong. Q4 2020 take-up across Europe was the strongest on record with all regions up year-over-year. European prime asking rents grew 14% year-over-year.
- High-quality assets are leading the office market recovery with the definition of quality relying more than ever on lease term and credit. New supply will become the dominant force driving vacancy higher as the leasing market re-accelerates.
- The impact of WFH on occupancy needs will be sorted out this year. A more flexible approach to work is here to stay, and this will have long-term impacts on real estate requirements. Nonetheless, occupiers will start making more long-term commitments and leasing activity volume is anticipated to pick up in the second half of 2021.
- Alternatives (medical, single-family rental, cold storage, student housing, data centres, self-storage) are all seeing strong improvements. The retail revolution is still in its early days, but its role is becoming clearer and repricing will open opportunities this year for occupiers and investors alike.
This week I thought I would take a look at one of the sectors that has been heaviest hit by the global pandemic - hospitality. This significant area of our lives has been disproportionately hit by national lockdowns and travel bans. However, with every passing day, the pent-up demand for leisure tourism increases and the frustrations of Zoom meetings mean that business travel and face to face meetings will surely be warmly embraced as soon as governments and corporates allow.
For the investor, belief in this trading recovery is everything, with pricing directly linked to future trading potential. Whilst caution remains a key sentiment, it’s undoubtedly a question of when, not if, we’ll see a bounce back. The experienced and confident hotel investors are already preparing to step back in to help fund a sector that is lacking short term cash flow, but which remains one with the strongest long-term growth potential. Which is why the biggest global players are targeting the sector in 2021. Ultimately when so many things can go ‘online’ you cannot pivot your hotel experience to virtual.
The pandemic has challenged norms and accelerated trends. Hospitality businesses have to respond to consumer demand and to innovate, so we may have said goodbye to some outdated operating practices, but we have already seen hotels offering ‘work from home’ packages and the hotel product of the future will be more efficient, more exciting and more sustainable - environmentally and economically.
And it is no longer all about the gateway cities - they will continue to thrive, as evidenced by continued interest for core plus and value add investors in forward funding economy and mid-scale hotel developments in key cities. However, investors now recognise the value to be had in leisure and resorts. Global tourism may currently be hibernating, but be under no illusions, our view is that its heart is beating strongly and that this market will ultimately return.
Two weeks ago I wrote about the building blocks for the real estate investment market as we turned the corner into 2021. However, where do we see the commercial property market going over the course of this year, and what will be some of the major trends in the market? Here are some 2021 themes to follow this year:
Flight to Quality
- Ongoing risk aversion, an acceptance that returns will be lower if security is strong and a demand to ‘get it right’ rather than just get a deal done.
- Operational risks will be in the spotlight, with skilled managers and partners sought.
- Liquidity to remain high on the agenda, reflected in a focus on assets with a greater investor pool.
More Capital than Product
- With ‘lower for longer’ interest rates and distress held back, there is a shortage of both core and value-add product to meet investor demand.
- That demand, meanwhile, remains near record levels, even though fund raising has been volatile, debt availability more selective and some cross-border interest held back.
Changing Nature of Leases
- The rigidity of leases has again been highlighted by the pandemic, with occupiers seeking more flexible and often shorter leases that imply higher risk for investors.
- Pricing will however be very polarised, with business-critical assets continuing to see longer leases and added service lines boosting income potential for landlords.
Equality & Affordability
- Changing working, living and shopping patterns will continue to disrupt the status quo and a key theme for real estate to address is equality - notably via accessibility and affordability.
- This will be highly significant for residential, in particular, and will be a higher profile for investing institutions; however, all sectors will be impacted, and this will be one more factor highlighting the importance of governance.
Winners & Losers
- The key takeaway from COVID-19 is the dramatic acceleration in business, social and environmental changes impacting success, signalling a marked polarisation between winners and losers as well as a further push into alternative sectors.
- This will be seen not only at a corporate level but also in each real estate sector. With needs evolving rapidly, understanding the occupier is critical alongside flexibility in how real estate can be used.
Climate & Legacy
- Climate change may now be addressed more forcibly as governments target a green recovery and corporates rethink their needs.
- A failure to act by investors risks them having to accept write-downs due to lower tenant demand and regulatory requirements.
- There will also be added impetus to focus on investment in skill clusters that support technology and innovation.
We enter 2021 with reasons to be optimistic amongst the obvious concerns around the continued impact of the pandemic across Europe. For investors this is an interesting time to be taking action, as there is light at the end of the tunnel and so a more normalised world for real estate will gradually return during the year.
Here are some key themes that we expect for 2021:
- A more active year for investment. Renewed lockdowns will hold back the Q1 recovery, but investors will lead as vaccines allow markets to reopen and animal spirits, low interest rates and pent up demand will come to the fore. However, locals will still be in control as the vaccination roll out will push into 2022.
- Core to lead with a reappraisal of return targets pushing yields down. Distress will mount as the recovery grows and support measures are eased, however this will bring opportunistic potential in H2.
- Occupier recovery delayed with lockdowns and weaker labour markets impacting in H1 but demand polarising as winning businesses act.
- Lull in political risk as Trump leaves and BREXIT is signed but this may only be temporary, with governance becoming of increasing importance.
- Plan for a green recovery driven by society, users, investors and government investment and regulation.
- Cities remain a magnet for growth with agglomeration bringing innovation, clustering and green efficiencies.
- Convergence of digital and physical to dominate the corporate and CRE agenda.
My hopes for the year are that we can get through this period of dislocation and emerge into a more normalised period of activity as the global economy seeks to rebuild itself from the horrors of the coronavirus. Good luck to everyone.
I was asked this week whether I thought that the office sector was facing its e-commerce moment, as seen in the retail sector.
My simple answer is a qualified 'no'.
It is clear that the COVID-19 period has accelerated changes that were already underway with regards to flexible working and working from home. The talk in the immediate aftermath of the lockdown, as people took to Zoom and Teams with vigour, was of how people may not come back to the office. However, the last few months have seen a level of fatigue setting in and a realisation that the office is where you go to meet colleagues, collaborate, learn and, from a corporate perspective, imbibe the culture of an organisation. And most companies have seen their well of culture getting lower and lower as time has gone on. I have no doubt that many companies will be stronger once people can get back to the office in full force, and the news of a vaccine on the horizon is a very welcome development.
So, I believe that many people will, when they can, settle into a longer-term mix of working both at home and in the office. Therefore, when the dust settles, the shift looks unlikely to be as significant as might first have been anticipated and will be counterbalanced by a need for less density and more ancillary space.
Change will also be impacted by the existing corporate planning horizons as well as leases. It will therefore take a few years before we see the full impact.
There does, however, look to be a shift in locational preferences, with more local emphasis thinning out demand in ‘support’ locations surrounding the core, but an increasing demand for prime, modern, flexible space in the core itself.
Learning from retail, we can expect a marked shift in where value is seen across the office spectrum - with more value for the core and for convenient local hubs and less value for commodity space between. The best may therefore become more expensive - as with the retail destinations of Bond Street or Champs-Élysées.
A couple of months ago, as we ended the summer vacation period, our Capital Markets business across EMEA was waking from an unprecedented period of low deal volumes. There has since been increased activity in most markets, led by Germany, as CBDs went back to work and the number of assets for sale picked up.
Today, the second-wave lockdowns across Europe have undoubtedly caused investors to think hard about where they look to allocate capital in the European arena. And whilst you might imagine that activity would have faltered again, this only shows a part of the picture.
That capital is becoming more and more focussed – there remains very good demand for certain sectors such as logistics, residential and alternatives in good locations.
In the office sector, there remains good interest in core and also in value-add, providing that pricing has adjusted. However, in between these two there is a significant mismatch between buyers’ and sellers’ views on value.
Much of the caution in many markets relates to what the sustainable rent will be for offices, or retail for that matter, when all the lockdowns are behind us.
In fact, the retail market is rapidly moving to a position where pricing has fallen to a level to tempt back in investors who want to buy towards the bottom. To date the deal volumes for 2020 are at €22.7bn.
The key to activity in all cases, however, is clearly price discovery – and a realistic buyer and vendor who wants to get a deal done.
Where security and liquidity are good, strong pricing will be sustained and a wall of money remains in place. Where there is greater risk, capital needs to be rewarded well to be deployed – whether in the levels of income received, the security of the return, or the long term capital growth potential.
So if the demand is not in question and if the pricing is right, we then have to ask whether we will see the right supply to meet that demand. With economic stress set to remain, one would have to assume the volume of motivated owner occupiers, lenders, leveraged investors and restructuring funds will only increase into 2021.
In our Global Office Impact Study & Recovery Timing report, we examine the effect that these forces have on office markets across the globe. The key findings show that, unsurprisingly, there will be a significant hit to office demand as a result of the global recession and at the same time the office sector will be re-shaped by the increase in remote working. This latter structural change causes an initial drag on aggregate demand across Europe of 17.4%.
However, most European cities have very low vacancy rates, both by global and historical standards, and this will limit the downside of individual markets at this difficult time.
By Q3 2022, we expect office demand to turn positive again, driven by increased office-based employment. This would be a 10-quarter recovery period which is similar to that of the GFC.
In addition (and this is perhaps the key to the report) the growth beyond 2022 of net office demand will be significant until the end of the decade (some 35 million sq m). This is despite the drag on demand due to ‘working from home’. And the reason for this is that many of the jobs that the global recovery will create are knowledge based - for example in technology and life sciences - where there are requirements for collaboration and community.
It is for this reason that I remain confident that the office will survive and thrive, and consequently will continue to be a significant CRE investment sector.
One of the sectors that has been a ‘winner’ out of the COVID crisis has been logistics (when did we stop calling it industrial?!). This is obviously no surprise given the huge acceleration in e-commerce that came about as billions of people across the world were in some form of lockdown.
So, it has been no great surprise to see that there have been a number of core deals, and some non-core ones, in this previously unfashionable sector. In some of the Core+ deals we are starting to see yield compression – the buildings need to be in core locations but the “+” element is another factor, such as a shorter lease or older building. This is proving attractive to those investors who are being priced out of the truly core market. We certainly did not anticipate that we would see such strong appetite for these types of deals so quickly, but in a recent survey we undertook on Investor appetite, 52% of respondents said they were looking to increase their allocation to the Logistics sector in the foreseeable future. 62% of our respondents also felt that we would see continued yield compression on specific assets over the next 6 months, with 17% feeling this shift would be across the whole sector.
Rental growth is starting to come back onto the table, albeit this depends on the micro-market. The specialist operators are most bullish in this respect and are best placed to take advantage of it. This will be a defining trend of the coming cycle, as the specialist platforms look to outperform the market.
Additionally, retention rates remain above the long-term average, as occupiers look at strategies including ‘blend and extend’ on their core operational portfolios. The capex required to move can be a hindrance, so partnership with landlords on extension initiatives can benefit all parties.
I’m pleased to see, though, that major narratives such as ESG remain paramount, and whist COVID has dominated the immediate thinking, the sustainability agenda remains at the forefront of considerations on buildings and location. This is a long-term trend and remains a priority consideration.
Two weeks ago, below, I wrote about how attitudes to the office seemed to be changing - after an initial weight of opinion towards ‘why do we actually need an office?’ there has been a swing back to a realisation that the office provides a much needed focus for collaboration, learning, mentoring and cultural engagement. Well, after two weeks of quarantine, having got caught out in Spain by the Government’s announcement, I can tell you that I have been itching to get back into the office!
So, it was a relief to be able to head back this week to our London offices, even if the social distancing measures still make it all a bit surreal. (A big shout out, by the way, to our facilities and on-site management teams who have made the return to the office a really positive experience).
What of the real estate markets? It is worth noting that, whilst the macro mood has dipped as we’ve seen a resurgence of COVID-19 in some areas and a renewal of lockdowns, the mood of investors has not really suffered. Our latest real estate sentiment survey shows that the outlook has continued to edge upwards due to a better perception for transactions and deal pipeline.
In addition, there is an improved sentiment in the debt markets with more real estate lenders open to financing new deals compared to two months ago and with pricing gradually returning to pre-COVID levels.
On a sector basis, the polarisation in retail continues to grow - with food stores in strong demand, some retail warehousing and outlets seeing good interest, but in-town centres and high streets feeling the pain. Elsewhere, logistics continue their ‘favourite’ status.
It is still too early to be sure how the end of the year will work out - demand is there from investors, but will we see enough supply in the market? Off-market transactions will therefore remain a focus. However, with many investors working to year-end targets, there is a mood in many markets to get things done if possible. We therefore still have hopes in Europe for a busy end to the year!
The last few weeks have seen a steady increase in the number of people spending time in our corporate offices in London. In many ways it feels like a regular summer, with many people, including myself, being away from their desks on vacation. My arrival in the Balearics coincided with the announcement by the Government that I’ll be entering quarantine upon my return (not just me of course), just when my working pattern of remote and office was starting to become more established!
The summer has also seen a number of businesses communicating a different position than they did early during lockdown. People that were questioning the purpose of an office have become advocates for the value of bringing people together in a corporate environment. There is a sense of inevitability that the true purpose of an office workplace will be re-established. Those decrying the need for corporate headquarters have been overtaken by the physical and emotional needs of the people that fill the very desks that have been bereft of their occupants during the preceding months.
People have a need to be around others and it’s becoming clearer that ideas, collaboration, inspiration and enjoyment at work come from being with and around colleagues and friends.
As might be expected, we’ve also seen an increase in investor activity and interest during the past month. There is a recognition that ‘prime office’ isn’t going anywhere as a valued asset class and a key component of a successful portfolio. The challenge for many buyers right now is the availability of assets. The market is ‘over-subscribed’ with more bidders than there are available assets. We haven’t seen the price chipping that some erroneously expected, in fact in general we are seeing prices at the quoting levels with a number of under bidders on each property.
We absolutely recognise that the working environment will, and should, become more fluid, more flexible. Why would we remain with a notional 9-to-5 Monday-to-Friday working week, when there is far more to be gained from recognising that we open ourselves up to a broader talent pool by offering a more flexible working structure?
The weight of opinion is shifting more heavily back towards the office being the cornerstone of our new way of working. The future will certainly be different and that is one of the positives we can take away from the terrible crisis in which we’ve found ourselves. I, for one, will be very glad to walk through the doors of my office building again after my holiday (and, yes, enforced isolation) and from the conversations I’ve been having recently, recognise that many of you feel exactly the same.
I have spent four out of five days this week working out of both our London offices, in the City and West End, plus one day working from home. This feels like the new norm, or as it was described by the Lord Mayor of the City of London in a webinar that I hosted this week, the ‘repositioned normality’.
Having said that, I am amongst only about 10% of people who are currently coming into the centre of London to carry out their work. Most people seem happy to continue operating from home, perhaps until September. Other cities have seen a greater return to the workplace than this. In fact, one or two of our offices are now back at almost 100% of capacity, but those are countries that have been less impacted by COVID-19 than the UK. Certainly, our colleagues in the US are also largely operating from home.
So, the question here is what are the implications of this for the office markets across Europe? Whilst the investment market seems to be returning to some form of normality, at least for core stock, this has in part been driven by the ultra-low interest rate environment that exists at present.
Occupationally, things are slower though. Inevitably occupiers are taking their time to make decisions, and many are deciding to postpone such a critical business decision by undertaking short term extensions or utilising flexible space options. However, in the last couple of weeks, our Leasing teams have signed a number of market-boosting transactions that were agreed pre-lockdown. Some of these have been in markets where the emergence from lockdown has been slowest - in London, BP (19,000 sq m) and Baker McKenzie (14,000 sq m) and in Moscow, Tinkoff have a signed the largest ever private-sector deal (78,000 sq m).
I am hopeful that we will see a continued increase in activity from office occupiers as the year continues, even if a full return to previous levels might require an imminent vaccine.
The second quarter ended with a somewhat brighter investment outlook despite still clear headwinds, exemplified by the weakness of rent collection in certain sectors. That, however, was largely expected and confidence continues to slowly return with a more encouraging view on transactions and pipeline. Sentiment towards values has remained more cautious, with concern over rents and incentives.
Germany is still leading the way, but others are also seeing confidence edge higher, often where COVID-19 has had less impact and is hand-in-hand with measures to normalise their economies, with the Nordics and Central Europe gaining for example. London aside, the UK remains in a weaker position and Brexit uncertainty later this year will not help this.
For good or ill, meanwhile, structural changes are accelerating, with the collapse of retailers and retail property owners juxtaposed by increasing demand for logistics, residential and alternatives such as data centres. A lack of activity is, at the same time, holding back price discovery, leading to a two-tier market based on occupier risk. This will accelerate as occupier distress forces action.
Encouragingly, however, for those on the side lines the wait may soon be over. Actions are now being taken that will unlock opportunities as, for example, lenders make a move. In addition, the flow of sale-and-leasebacks increases. This will set the scene for more activity, albeit in a very polarised market.
Last week I spent my first couple of days back in the office in our European HQ in the City of London. It was surreal venturing back onto the train and the tube (wearing my mask), although what I expected to be a difficult journey was not - very few people on either form of public transport, so social distancing was easy. It was good to be back.
Whilst in the office, along with a few colleagues, thoughts turned to how long it will take us to get back to normal, given that there are obviously restrictions on the numbers of people that can occupy the office (currently we are at 25% in London, other cities in Europe are getting up to 50%). This will take time and potentially a vaccine. But where do we go after that? What are the implications for the office longer term? Will we see companies taking reduced floor space as more people will work from home? Will occupiers start to move towards a ‘hub-and-spoke’ model? Or will things just go back to the way we were pre-COVID?
This week we hosted a webinar for our clients, both investors and occupiers, to try and shed some light on this. It was led by our Global Head of Occupier Business Performance, Despina Katsikakis, and drew on our Experience Per Sq Ft (XSF) at Home survey, where we have had over 50,000 respondents. This column is too short to go into the detail (please listen to a recording here) but I am pleased to report that the office is far from dead! Yes, people are likely to want to continue to spend some of their working week at home, but the office will continue to be the place where people come together to collaborate, learn and meet. If anything, the office will be a part of a wider ecosystem of places that people choose to work from.
I am even more convinced of that having spent the last 12 weeks working 100% from home.
The logistics and industrial sector has been one of the winners coming out of the COVID-19 crisis. Supply levels were low in most core markets going into the lockdown, sometimes less than 2%. Add to this the fact that, for every $1 billion of additional e-commerce sales, the market must provide an additional 1.25 million sq ft of logistics space. It has also been the most resilient market in terms of rent collections over the last few months.
Global capital is therefore increasing its weighting towards logistics as a response to this. In terms of lockdown transactions, this was the most robust sector and it is therefore no wonder that activity in the investment market has picked up quickly since countries have started to return to work.
Current transactions that the team are working on are coming in at pre-COVID pricing levels, or even slightly higher. Core logistics deals are now well underway across all geographies in mainland Europe and larger transactions (up to €500m in Germany) are now being talked about.
Whilst we have some way to go, this year could see in excess of €30 billion transacted by year end, which would be close to a record year. However, questions remain as to how quickly value-add will come back and there is the threat of business failures later in the year which may cause an interruption to this upward trend. But at present, for many investors in this sector, it is a case of identifying the product that they want in a shallower bidder pool, rather than the COVID discount they desire.
I’ve previously discussed the ongoing debate that occupiers and investors alike are having with regards to the future of the workplace, once we get back to ‘normal’ in a post-vaccine world. Our extensive survey of many of our corporate clients - Experience per Sq Ft at Home (XSF@home) - has had over 40,000 respondents, a significant sample size by anyone’s standards.
The results of this survey show that 50% of people expect to work in the future through a combination of locations, be it home, office or third places. And occupiers will be addressing their portfolios accordingly. Expect to see a combination of core HQ style offices, more local community hubs and flexible locations, with the ability for companies to scale up and down their footprints.
However, at its heart the office will have a role to help leverage the new digital equality that has arisen as a result of the last couple of months. Whilst people report that remote collaboration has reduced the feeling of locational and structural hierarchy, they do feel there is a disconnect when it comes to company culture, team connection and learning.
Some commentators have stated that they see a significant reduction in the total requirement for office space. I do not believe this to be the case. Companies will provide different types of space in order to provide an exciting, collaborative, flexible work environment, potentially in diverse locations. However, at its heart I believe people will want to work face-to-face with other people, but potentially not every day of the week.
I wrote last week, below, about how our Asset Services teams are helping investors and occupiers alike to adjust to the gradual emergence of the business world in Europe from lockdown. Cushman & Wakefield has been leading the way in opening up all types of commercial real estate, from office complexes to shopping centres. Our Six Feet concept has been at the heart of our approach.
However, investors are already beginning to consider what the future will bring for their portfolios. This crisis will most likely lead to a new reality in the way we work, shop, live and play - landlords need to adapt to this. This is the first global pandemic of the 21st century and there will inevitably be a concern that more could follow. Crisis and risk management will become a much more central consideration than it has been to date and will therefore become part of lease negotiations in addition to management and operating concepts. Expect, therefore, these issues to be much higher up the agenda in any discussions between investors and occupiers.
More investors are realising the importance of good data in the current climate and the importance of digital solutions and connectivity. Business plans and capex projects based on the old world will have to be adjusted to ensure they can flexibly adapt to the new normal to ensure value-add solutions.
There is a lot to consider and adopt, which can be different for the various asset classes - but central to these changes will be technology, digital, behavioural analysis, contractual and risk management and customer experience.
I'd like to highlight the efforts of our Asset Services team in managing our clients’ properties so seamlessly during the COVID-19 crisis. Our Cushman & Wakefield colleagues on site have been on the front line, and we should not underestimate the risks that they have dealt with on a daily basis. Those working from home, in running these services, have done so with imagination and good humour.
Dealing with lockdown has meant looking at a range of different closure scenarios, and inevitably there was a strong focus on rent collection. Whether it has been rent abatement, lease renegotiations or other cost saving measures, these discussions between investor and occupier have needed to be dealt with skillfully and sensitively.
The built environment is now at varying stages of preparation for the return of workers, shoppers, students and visitors. Cushman & Wakefield’s management teams are helping people to do so with confidence. Across all industries, it is about the user’s ability to feel comfortable, safe and secure - this will be paramount to a swift business recovery.
Across Europe, we have been helping our investor clients to reopen buildings, whether they be offices, warehouses, shopping centres or other types of facilities, using the Six Feet concept. The response from owner and user alike has been positive.
However, the short-term return to work does not diminish the debate that is taking place about what long-term changes the current crisis will bring. These will be inevitable and the investors who react best to these changes will seize the day, as occupiers gravitate to those who provide the nimblest responses to shifts in market demand. I will cover this more next week, but for now a big thank you to every member of our Asset Services division.
With some of Cushman & Wakefield’s offices across Europe opening last week, and more planned during May, we are tentatively seeing our transactional business increase in activity. Not that things have been completely shut down - some deals have continued - however the pace of transactions has inevitably been slower.
For those countries that are behind on the path to reopening, there is some hope to come from Germany. Yes, Europe’s largest economy seems to have weathered the COVID-19 storm better than most, with significantly fewer deaths than all the larger Western European countries. However, the speed with which our transactional businesses have responded to the ‘end of lockdown’ has been extremely encouraging.
In fact, there were several investment deals that were agreed pre-COVID, which have now successfully completed. Significantly, we have new transactions now underway. In addition, our team in Germany is starting to take to market several significant sales mandates and initial indications of buyer interest are good. The level of capital available to many real estate investors, and particularly to the German funds, means that we are anticipating significant interest.
In addition, we are already seeing signs that leasing activity is starting to ramp up. All this gives us hope that the ‘engine of Europe’ is pointing the way for the rest of us to follow.
As I wrote last week, the debate amongst investors and occupiers is hotting up around what the longer-term impact on the office markets will be of the COVID-19 crisis. The response is, of course, led by the occupier. The world’s largest ‘Working from Home’ (WFH) experiment is deemed by many companies to have been a success, and a game-changer in how they will think about their offices after a vaccine is found and business returns to ‘normal’.
On one hand, some companies believe they will be able to operate in much less space, as they have a greater mix of agile working and WFH. And on the other, companies may decide they need to create more space for co-creation and social purposes. At the same time, we have the impact of our denser working environments. Will this be the signal for a longer-term move back to a more spread-out floor plate? This will be the case in the short term, but will it be a post-vaccine development as well?
There is also a view that some companies will seek to set up satellite offices outside the larger cities - places that their staff can go to without having the commute into town. I was reminded by my US colleagues of the post-9/11 movement by companies out of Manhattan, but within a few years many of the same companies had moved back into the city.
I believe that ultimately the ‘war for talent’ will mean that city centres will remain attractive locations in which to invest, although the gap between prime and secondary locations will widen.
The implications of these movements for the investor world could be profound, and we have started several projects with clients to examine their portfolios and assess how they will be impacted by these changes.
The last week has seen a significant debate starting about what the future of the workplace is going to look like. We all know that there are going to be two periods that need to be considered - the immediate return (Horizon 1), which is the opening up of offices once lockdowns are released, and the longer term pattern of work (Horizon 2) once a vaccine is in place and the world returns to normal (whatever normal may be).
The Horizon 1 debate is active and has significant implications for both landlords and tenants. Many companies are now using C&W’s Return to the Workplace guidelines, some involving the implementation of the Six Feet Office. These principles do not just apply to offices - this week we are opening two shopping centres in the Netherlands, and there will be more to follow across Europe.
The longer-term debate about Horizon 2 is just starting to warm up. There have been a number of CEOs who have stated that they see the landscape of their property portfolios changing in the mid-term. Views vary from “we are never going back to what we had before” to “we see no discernible change; in fact, we need to give more space to our people”. As ever, the reality will probably lie somewhere in between. One thing is for certain though - the changes outlined will require thought by all investors when considering their investment into commercial real estate.
Over the last couple of weeks, the debate has been turning increasingly to the ‘return to the workplace’. Investors are no different; the initial phase of lockdown was all about ‘securing the portfolio’ (which also meant discussing rent payments with tenants). But now across Europe the debate is about how best to reopen, as and when allowed by the Government.
Our ‘How to guide’, developed by Cushman & Wakefield’s Recovery Readiness Task Force, is the playbook that is now being followed by investors and occupiers alike. It is a guide to help businesses get back into the workplace in a safe way, and this is the predominant talking point amongst all our clients.
This will be managed in different ways by different companies and sectors. However, the debate is already starting to turn to what the future of the workplace will be like in the longer term. Will we see less dense office floorplates? Will the CBD of cities be less popular and regional or suburban centres increase in popularity? What is the longer-term impact of the great ‘working from home’ experiment? There is no consensus on this but the answers to all these questions will impact the shape of our cities to come and the commercial real estate landscape of the future.
Increasingly over the last couple of weeks my conversations with Investors have been turning to ‘what do we do when we are ready to return to work?’ There is a realisation that there will be a new norm for a while, until a vaccine is fully in play. And this norm could involve some very different working practices.
So, investors are inevitably asking what their own customers (the occupiers) are going to be doing. At Cushman & Wakefield we are leading that debate through our Recovery Readiness Task Force (RRTF). The RRTF this week launched our Recovery Readiness: A How-to Guide for Reopening Your Workplace. This 30-page guide to getting back to work will become integral to many of our clients as they seek to return to the office.
However, longer term, there are many questions that our clients are beginning to ask:
- Will the COVID-19 crisis mean a move away from less dense working environments, thus impacting design and construction of new office developments?
- Will some organisations move back to a more cellular working environment (as I heard from Germany this week)?
- Will organisations move to more of a hub-and-spoke occupational model, with the positive impact that this might have on out-of-town office markets?
Plenty of questions, and yet very little clarity, but at least we are starting to see some direction from certain countries on the timescales for getting back to work.
I've been pondering the changes that have taken place over the last few weeks of lockdown. My thoughts turn to what is likely to lead us out of the situation that the commercial real estate markets find themselves in, as a result of the current crisis.
As much as I am concerned with ensuring our investor clients have the best access to information and insight at this difficult time, it is apparent from the many conversations that I have had that investors are just as concerned over what the occupiers are going to do. It is the occupiers, after all, that pay the rent and whose covenant strength underpins any investment.
So, let me give some hope surrounding the strength of the leasing markets across Europe. Cushman & Wakefield is currently involved in over 4,000 leasing transactions across EMEA. Of these between 65% and 80% of those transactions are still ongoing (dependent on sector).
It is no surprise that smaller transactions have been most at risk and that the retail sector has seen the most fall out. However, less than 5% of transactions have been cancelled. The difference between these two numbers are the deals that have been ‘shelved’ or put on ice. Time will tell whether these will return to the table.
Given what is happening these numbers are encouraging. That is not to say that all the deals still being worked on will conclude, as much will depend on a successful return to work - take a look at the 6 Feet Office concept. However, they at least indicate that many occupiers are continuing in the expectation that some form of normality will return in due course.
It would be too simplistic to think that the investor response to the current crisis is dependent on which sector you are invested in.
Certainly, if you are deep into retail and hotels then you will be very concerned about the strength of your tenant base and how your rent collection held up at the end of the quarter.
However, those questions are still pertinent to holders of industrial and office stock, even if the former seems to be particularly busy at present ensuring they are keeping the vital supply lines open for essential goods and services.
So, management of your existing stock is more important than it has ever been, and our Asset Services teams are doing sterling work for our clients ensuring that things continue to run smoothly.
There have been key lessons to learn from our APAC business particularly around areas such as public health and tenant communication.
In the meantime, I can report that transactions are continuing – both sales and lettings. Existing transactions, many of which were in place pre-lockdown, are, by and large, still in place. On the occupational side this is particularly true at the larger end – smaller transactions have seen more fall out.
And so inevitably the focus turns to where the opportunity for investors might lie in this whole situation. I well remember the first movers coming out of the GFC – the ones that bought cheaply when others were still on the side-lines.
We are not anticipating the same reduction in values, particularly in a market where the fundamentals were strong going in and the level of capital to invest remains high.
Winners of the COVID-19 era will be the all-equity investors (debt finance is likely to remain weak) that see the bottom and are prepared to buy an asset before others see it.
Without any question the last few weeks, dependent on which country you are in, have been some of the most challenging in which to operate as a real estate investor.
Not only are you operating from home (thanks to video conferencing, group chat and webinars), but your portfolio is dealing with the realities of lockdown: offices are largely closed, retail is closed (unless its grocery or other essentials), logistics is working overtime to keep the supply chain open for those essentials, hospitality is closed, student housing is closed.
Of course the management of those premises continues, and our Asset Services team is on the ‘front line’ ensuring property management continues as well as managing the quarterly or monthly rent payments - and, any non-payments.
The implications spread far and wide - valuations are inevitably impacted, but where will the evidence be for these going forward if we have an extended lockdown and leasing transactions slow down?
Transactions presently in lawyers’ hands look as if they are proceeding. The pipeline for later in the year will be impacted, although technology will play a part as we undertake virtual viewings. New development or refurbishment construction is also impacted across many EMEA countries.
The investment market is being impacted to various degrees depending on the sector. There are plenty of existing transactions that do seem to be proceeding, albeit slower than before.
Interestingly there are investors now waiting on the sidelines, looking for the floor to appear, and ready to jump in. Globally there is over $300 billion available to commit to real estate, and in which real estate that is put will truly define the winners and losers of this crisis.