The office landscape has undergone a significant transformation in recent years.  A surge in remote working, hybrid work models, and the ever-increasing popularity of flexible office spaces has all put pressure on traditional office spaces.

However, as the React News article below outlines, office values are facing another challenge.  The sharp rise in gilt returns is causing a number of funds to reconsider their commitment to real estate as a whole and offices in particular.  Is the added risk and illiquidity of real estate worth it when compared to a “risk free” rate that is sitting at around 5%?

As such, many funds are reconsidering their allocation to the sector.  Some offices will remain attractive investment opportunities but, as the article notes, many will be small, non-prime and will come with concerns over future occupier demand and ESG related obsolescence which will make them difficult to sell.

What, therefore, will happen to this excess office space?  Change of use – office-to-residential or office-to-hotel conversions for example – is not a new concept, but an increase in the number of office buildings being offloaded and a fall in values is likely to lead to a greater number of conversion opportunities.

The demand for housing, particularly in urban centres, remains high, and converting underutilised office buildings into residential properties would help addresses this demand while bringing fresh life to city centres.

Conversions are not without their challenges – residential space standards, for example, mean that not all office floors are able to accommodate a change to residential use.  However, there have been many successful examples and the rise in obsolete office buildings coming to market will no doubt accelerate that trend.  Secondary offices may be falling out of favour, but there remains plenty of opportunity.