Investments in office real estate, as a part of total transaction activity, declined by 20 per cent in North America and 50 per cent in Europe and Asia-Pacific in 2022, according to a new report by TD Global Investment Solutions.
It found while global office transaction cap rates rose over the past year, private asset valuations slowed to reflect the upward pressure on cap rates. Meanwhile, public office real estate investment trusts have witnessed significant swings in pricing due to negative sentiment and market speculation. While further write-downs to office values are expected, adjustments will be reflective of actual market activity, the report noted.
The TSX/S&P REIT Index was down 21 per cent from March 2022 levels and was priced 30 per cent lower than its International Financial Reporting Standards net asset value. Private office assets in the MSCI global quarterly property fund index witnessed capital depreciation of 10 per cent.
According to the report, the recent REIT downdraft suggests PCRE cap rates need to expand by another 50 to 100 basis points. However, it noted REITs have historically overshot the mark.
Office occupancy in North America was consistently in the range of 40 per cent to 60 per cent of pre-pandemic levels, but remained higher in Europe (70 per cent to 90 per cent) and Asia-Pacific (80 per cent to 110 per cent).
In Canada, office utilization decelerated at a faster rate largely attributed to the Calgary office market, following the oil recession in 2015. Within Toronto, longer commute times discouraged workers from returning to the office and large employers — including the federal government, major banks and life insurance companies — have adopted hybrid work policies.
While employees have pushed back on returning to the office, the report noted a potential recession featuring cost-cutting and layoffs may influence employers to move away from hybrid work due to the supply-demand side of labour shifting in favour of employers.