What opportunities for office Real Estate in 2024?

Each month, LBP AM provides video analysis of market news. Today, Christophe Murciani, Head of Real Estate Debt at LBP AM, explains why developments in the office real estate market in 2024 represent 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 curb inflation. In this context, what can we expect in 2024? 
While retail, hospitality and logistics assets boast sound fundamentals, such as rising sales in shopping centres, large numbers of tourists for global events, reindustrialisation, shortening of supply chains and growth of e-commerce, office real estate poses a niumber of analytical challenges. 
Market participants are not only contending with interest rate pressures, but also with shifts in office usage, a decade-long accumulation of oversupply, tightening ESG-related constraints and a contraction in the availability of bank financing.

Interest rates have risen spectacularly, from 2.75% to 4.50% for the best Parisian offices over 18 months. Appraisal values have fallen as a result – a trend that has gained momentum over the past year. 
Office use is also changing, with remote working pushing tenants to prioritise more central, well-connected locations, while reducing the space they occupy by around 15% to 25%, with little change to their budget. Their aim is to cajole their employees back into a pleasant working environment.

The scale of office oversupply can be illustrated by two figures. First, around 44 square metres of office space have been being built in Île-de-France for every new service-sector job created since 2015, compared with a benchmark of around 11 square metres per workstation. Second, the Saint-Ouen/Saint-Denis area in north-east Paris is expected to offer 600,000 square metres of new vacant office space by the end of 2024 – the equivalent of nearly six years of take-up at the current pace.

Sustainability is being imposed through the Tertiary Decree in France and its equivalents in other European countries, as well as through savings regulations via the SFDR, all of which are pushing up renovation budgets for managers and property owners. 

Lastly, banks are currently limited by the need to extend or renegotiate transactions secured on high-volume assets that have since become illiquid. As a result, banking capacity is likely to be absorbed by this refinancing, rather than allocated to new deals. 

That said, the real estate market is deep enough to keep generating opportunities. We believe we are on the cusp of a broad regeneration movement within the office stock – either through conversion, in areas suffering from clear oversupply, or through upgrades in technical standards, environmental performance and interior design to meet new usage expectations.

We are convinced that five-year financing for the transition of existing real estate will offer investors an attractive risk/return profile. Such financing will contribute to shaping the offices of tomorrow – the kind of properties that will once again attract institutional investors or retail fund managers once the macroeconomic environment has stabilised.