As companies start rethinking their office requirements following the coronavirus outbreak, Aviva Investors’ CIO of real assets Mark Versey says secondary office locations will struggle in the short run, while city hubs 'should be fine’.
‘As an investor, we were fortunate in going into the crisis with low vacancy rates in offices generally, particularly in our core cities, and long lease exposure. So, we're in a relatively strong position,’ Versey says. ‘We don’t expect businesses to cancel their office space in the short term as more office space is required to accommodate staff under social distance requirements. However, in the medium term, occupiers will certainly rethink their office requirements.’
While Versey still believes offices have value – for collaboration, relationships, motivation and a sense of community – he admits that there could be less occupancy, so less space will be needed going forward.
‘City hubs such as London where all the talent clusters today should be fine,’ he notes. ‘We are thinking about how to redesign some buildings to allow for more flexible working, and we continue to have more of a focus on core locations. Some secondary office locations may struggle in the short term.’
The concern would be that if the crisis is prolonged or turns out a lot worse than expected, default rates will rise. In some cases, investors might lose the competitive tension. In prime locations, businesses up until recently have competed for office space. That tension obviously benefits investors. If that competitive tension drops significantly, the level of risk rises, Versey argues.
He says: ‘If everything returns to normal in 2021, there should be a rebound in property – perhaps not a full recovery, but not far off it. And we would expect prices to come back to par in 2022. But if we have a deep recession that starts causing businesses to close, real estate will face a worse scenario. In market dislocations such as this, the first impact is usually to equities, then corporate bonds, and eventually real estate.’
Real estate lags the corporate impact caused by a contraction in GDP because it takes time to quantify the impact on occupiers and cash flows. Versey expects that the impact will initially be felt on capital values, followed by a more severe impact on occupancy levels.
