Offices

With a volume of almost €1.3 billion, the momentum in the office real estate investment market in 2023 was disappointing. This volume constitutes a reduction of 68% compared to €3.9 billion in 2022. A combination of factors caused this reduction. Uncertainty persists about the impact of hybrid working, while at the same time financing interest rates rose more than expected, which also caused office property values to fall more sharply. Office capital values declined by an average of 40% compared to the peak at the beginning of 2022. Yet there are also opportunities in the office market, especially for real estate that meets the highest sustainability requirements and is easily accessible by public transport. 2024 is expected to be another difficult investment year for office real estate, with an expected volume of €1.6 billion.

Trends and developments

• Falling property values are having a major impact on investors and could result in forced sales. Returns from office funds are under pressure, which in turn has triggered a serious reduction in capital inflows. This has led to redemption: investors are keen to liquidate or reduce their position in the fund. Funds may find themselves in trouble if they fail to find new capital. The forced sale of office real estate may be a consequence of this.
• The sharp fall of real estate value is also a major factor affecting refinancing. This is because the loan-to-value ratio deteriorates and financiers have a more stringent policy for the LTV ratio. If the value of the real estate drops, it may no longer be worth enough to fully cover the loan. This may create financing problems and forced sales are sometimes the only way out. We estimate that of the more than 100 properties bought between 2017 and 2020, 10 to 15 of these properties may face these kinds of issues. This means that office real estate worth between €500 to €750 million will come onto the market in 2024.
• Changing occupier demand for sustainable office real estate at public transport hubs has led to a narrowing of the definition of ‘core real estate’ amongst investors. This is mainly because of the increasing risks of vacancy for office buildings that do not meet these conditions. For owners of office premises who previously considered their real estate as a core investment, this means an additional depreciation in value, on top of the impact of rising interest rates.
• Tenants who prefer easily accessible offices, equipped with key amenities and having the highest sustainability standards are contributing to a further division in the office market. This is not least due to the enactment of the CSRD. The scarcity of this type of office premises is pushing rents up by at least 20% compared to stock without these features. At the same time, not all tenants are prepared to pay a premium for sustainable office real estate. Of the tenants in our housing panel, a good 53% said they would be willing to pay more for a net-zero office building, while 11% said they would not. The remaining 36% have yet to make up their minds.

Office analysis

Driven by ESG ambitions and corporate CSRD commitments, we expect demand for the most sustainable office real estate to grow significantly faster than supply. In the five biggest Dutch cities and Zwolle, for instance, there are currently fewer than 30 energy-neutral office buildings, accounting for a total surface area of almost 300,000 m². In these six cities, around 700,000 m². of net-zero office premises are expected to be added to the market until 2030, including around 400,000 m² in Amsterdam. This will be achieved through new builds and renovation.

An analysis of 130 major corporates and public institutions with their offices in the G5 cities and the Zwolle region reveals that more than 68% of the current office space do not meet net zero requirements - as formulated by these companies themselves in their net zero targets. If many of these sustainability ambitions are to be achieved by 2030, demand from major organisations for sustainable offices at public transport hubs will increase dramatically. Based on our estimate, this group currently occupies 1.1 million m². of office space based on contracts that are due to expire through 2030.

This will in any case increase the shortage of sustainable office real estate considerably until 2030, while at the same time it will force up the rents in this segment significantly. The market for this type of real estate is set to tighten substantially due to the limited development pipeline, especially in cities like Rotterdam, The Hague, Utrecht, Eindhoven and Zwolle. Shortages are looming in Amsterdam, too. This is clearly a call to action for owners of office real estate. As a result, it is much more likely that office users will be forced to commit to buildings that do not meet their sustainability requirements.