Global office markets bifurcate on fundamentals and pricing
Our latest Global Insights & Outlook Office Report finds that varying return to office approaches post-COVID, underlying fundamentals of city functionality, approaches towards ESG-compliance differences and how markets have reacted to shifts in inflation and interest rates have created significant divergence in office investment volumes, pricing, and appetite globally.
Cap rates continue to face upward pressure, and investors are generally down on the asset class, making it challenging to price the market accurately today.
As a result, risk capital is circling office, looking for bargains. It is not uncommon for offers to come in 20%-40% short of guidance. Meanwhile, debt maturities are beginning to create distress as investors default on assets. Central bankers are signalling flexibility in their phrasing, suggesting that the rate hike cycle could, or soon will be, at its end.
Return to office in Canada is on a par with the United States, especially in the downtown cores of major cities, although Toronto has seen office occupancy rise to 60% by the end of Q1. Vacancy has risen into double-digits across most of the country, and after subsiding in 2022, subletting has re-emerged as an issue for the office leasing market in 2023. In several cities, more than 20% of vacant space is sublet space, and that number is rising.
Transaction volume has been extremely low for office, preventing price discovery in an era of much higher borrowing costs. Many major institutional players, traditionally the largest owners of high-quality office assets, have opted to sit on the sidelines, pursue development strategies, or diversify abroad.