2023 has been a tough year for office investors. Rocketing interest rates, soaring inflation, hybrid working and accelerated obsolescence have all taken their toll on values, drawing the inevitable comparisons with the last significant downturn seen in the aftermath of the Global Financial Crisis (GFC).

As a business we were able to perform then, notably through opportune office investments such as Milton Gate and Drapers Gardens, both in the City of London, and we will be looking to do the same now. But while the valuation impact is similar, the conditions and anticipated consequences now are also crucially different from 2008/9.

In the wake of the GFC, global leaders were able to respond with huge stimulus programmes through monetary policy, propping up the financial system and at the same time the real estate industry. While it was here that the seeds for the inflationary conditions we see now were sown, for the real estate sector the ultra-low interest rate environment had two more immediate impacts.

First, for investors able to deploy capital, it drove and sustained a very strong and rapid asset price recovery. Second, for the heavily indebted industry, it enabled investors and lenders to ‘extend and pretend’ mitigating some of the immediate cashflow pressure. We were still seeing positive cashflow, and debts were being serviced. Yes, there were technical breaches around loan-to-value (LTV), but the interest bills generally got paid.

This environment also meant that, in the absence of extenuating circumstances (such as those in the office market today), the recovery was widespread across different sectors and was relatively quick. In London in particular this delivered what turned out to be a relatively short window of opportunity and the stimulus tide really did lift all boats.

Now we have a very different scenario; policy is tightening, with higher interest rates piling pressure on cashflows and interest coverage ratios. As interest rate hedging falls away and refinancing events come through, extend and pretend will not be an option and we expect to see significant bank influenced and led activity through 2024.

The other obvious key difference we face now in the office sector is the ongoing impact of the Covid-accelerated hybrid working patterns and the resulting shift in tenant demand. Here we are witnessing very significant structural change. Aggregate demand is down, working from home is seemingly embedded for large segments of the economy and office utilisation is at historic low levels.

And yet, prime rents are rising. Not every office is subject to the same influences. While commodity office space is dead, the right asset in the right location can significantly outperform against the average, and the spread between the best and the rest is only set to widen. This is reflective of the changing nature of tenant demand, which is now almost entirely in this best-in-class segment as employers focus ever more on the key fundamentals of location, adaptability, amenity and sustainability.

So, this time not all boats will benefit; this is not like the GFC where people came back in and the value of whatever they bought rose. This time, stock selection and genuine on-the-ground expertise will be critical for picking the winners and the wins can be big.

In the past we would have seen a big clear out of stock and values rising as the cycle adjusted to the normal supply and demand imbalances. But given the current view that we need fewer offices, due to more people working from home, sections of the market will simply be lost, or, increasingly, repurposed to hotel or residential use.

But, in the best locations, whether it’s the City, the West End, or Midtown, areas where the influence of the Elizabeth line has made itself felt, we continue to see huge opportunity. Where you can deliver modern, best-in-class, fit for purpose space off the right entry price and basis, you will find a very receptive occupational market, because the demand will be there and new supply not necessarily so.

We are encouraged by what we’re seeing across the sector. While deals may be thin on the ground right now, signs of life exist. Investor interest is returning, activity is slowly increasing. Expertise, understanding the market, exercising diligence, and working hard to secure the right deal with the right business plan will be key to success.

We have navigated such choppy waters before and know that it is in these markets that some gems can resurface.