Insights

Watch this (office) space: How does working from home risk commercial real estate valuations and lending?

30/03/2023

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Sharon Stark , Senior Associate

An article from CNN on 27 March 2023 highlights how the ongoing popularity of working from home and hybrid working has led to higher vacancy rates and falling demand for office space in particular. An opinion piece in the Financial Times of 23 March 2023 sets out that UK base interest rates have risen as rental yields have diminished: "UK base rates have climbed to 4 per cent, up from a half per cent a year ago. Interest cover from rental yields has increased less. Prime office yields in London were some 4.5 per cent in February, according to Savills, compared with 3.75 per cent a year earlier". The danger highlighted by the Financial Times article is that lower commercial property valuations place pressure on loan to value ratios required by lenders. That risks being a trigger for assets being offered back to lenders or forced sales. The UK is not the US and one cannot predict how stresses on UK commercial property might affect the economy but both the CNN and Financial Times articles emphasize that we should be taking note of pressures in the commercial real estate market.

A lot of people hear commercial real estate and they think it’s all the same thing and the trends are they’re all the same but they’re not. The underlying fundamentals of multifamily and industrial assets remain relatively stable on a national level. It’s different for office and retail properties. There’s been a fundamental shift in how we use office space and that has changed demand. That’s something you should have your eye on, especially as low-interest office loans come due. We’re running into a situation where office-owners have to refinance at a higher rate and only 50% of the building is being used. That doesn’t translate to good cash flow metrics for the lender.

https://edition.cnn.com/2023/03/27/investing/premarket-stocks-trading/index.html