Our Thoughts
Wed, 12/01/2022 - 12:00
· 4 min read

2022 Office Market Outlook - An International Perspective

Larry Young, Head of International Investment Group, spoke to React News in January about the outlook for the international office market in 2022.

The office market is on the path to recovery, with a good deal of transactional activity across Europe in both the investment and occupational markets. By the end of 2020 and early 2021, investors had learned how to live with COVID-19 conditions and were still able to work out how to properly transact in the market. Occupational markets have bounced back by about 15% and investment markets by around 20%. The UK had the strongest recovery following the uncertainty Brexit presented, as well as COVID-19, and recorded the strongest GDP growth last year.

In 2021, the majority of capital invested across Europe was domestic and from North America, as the lack of travelling led to a fairly significant drop of Asian and Middle East investors. However, this capital is coming back, with travel lanes opening up and strong oil prices in the Middle East, and we expect this to continue in 2022 unless the Omicron situation worsens. The big sovereign wealth funds are in general active and if Asian investors properly come back to the market – especially to London where they previously accounted for almost 40% of the market – we could see a real increase in investment volumes in 2022.

Meanwhile, we have seen the German funds go to the UK, French institutions move more and more out of their markets and US capital go from value-add to more core funds. There are a number of large €500m to €1bn+ deals and with this diverse capital even these big ticket deals are generally still moving in the major markets.

The caveat to this continued recovery is the recent outbreak of Omicron. If this new variant is still a big issue by mid- to late January, then we will most likely see a slowing of both investment and occupational markets. 

In 2022, we will still see big deals but maybe slightly different capital sources to what we have seen in the past. As an example, before the pandemic some of the big South Korean players would do deals either on their own or with pools of South Korean money but now they will look for local JV partners.

Large tower markets like La Défense will take longer to recover, on the occupational side compared to Paris CBD for example, because the occupational market is still very difficult. In Paris CBD, there is even a bit of rental growth for the really core locations. In these parts, investors will feel more comfortable about putting stock out on the market, as there is such strong demand.

However, there have been times in different cycles when people said: “No one is ever going to work in office towers again.” Our view is that it will not be the case – but they will continue to adapt. Developers have to rethink how they build them and have to go up an ESG level and a technical level. They also have to think about mixed-use, e.g. including a hotel or high-end residential, as it is a big trend likely to bring some more life back into the market.

In terms of pricing, every time we say we don’t think prime yields will go any lower, they do, but if we still see uncertainties related to COVID – and with interest rates and inflation beginning to tick up in the Eurozone, the UK and the US –  that’s got to eventually have a bit of an impact on prime yields. If I had a bet, I would say prime yields would carry out on being stable, unless there’s a really big interest rate hike, whereas secondary yields and other parts of the market might carry on drifting out.

When you are talking to investors, they are often focused on ‘beds, sheds, and alternative sectors such as life sciences and data centres that have benefited from the COVID situation. Questions remain about the office markets, but if the asset is prime and in a central location or can adapt to the modern ‘hybrid’ style of working and ESG norms, then the investment and occupational market is still there. The office market is certainly not dead, but has to adapt to the (hopefully) post-COVID world.

2022 Office Market Outlook - An International Perspective