This commentary looks at the European office sector and the impact on offices in CMBS following the challenges of the Coronavirus Disease (COVID-19) pandemic and evolving trends for flexible working patterns.

“Although the reported fall in office take-up figures and the increase in vacancy rates suggest a downward trend in the market, the reported numbers are largely explained by the absence of any occupier movement during the lockdown period, causing delays to occupier take-up and a slight increase in supply. We believe that infrastructure, the surrounding amenities, and the focus on buildings with green or social credentials will play a much larger role in getting people back into the offices,” said Dinesh Thapar, Vice President of European CMBS at DBRS Morningstar

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DBRS Morningstar believes the credit outlook for CMBS transactions secured by office properties remains stable with some headwinds that are not yet reflected in the data. The pandemic abruptly changed office worker behaviours and some remain attached to the flexibility of working from home. Employers are encouraging workers back to the office using a carrot-and-stick approach. Environmentally friendly spaces with better and modern infrastructure is the softer-touch approach observed in some jurisdictions in Europe. On the flip side, the rising cost of living and certain habitual attributes of working from home are hard to overcome in a market where more jobs are on offer and unemployment is at an all-time low. DBRS Morningstar anticipates that while demand for office space is likely to decline, occupier demand for Grade A, smart, sustainable offices will grow and lease lengths for this type of product will remain long in nature. We will continue to see a further widening between Grade A prime sustainable office space and subprime offices, with ESG credentials (particularly environmental credentials but also social factors) increasingly becoming a differentiator. This could open further opportunities to value-add investors with business plans to upgrade older office space and achieve higher rents, particularly in an environment of increasing interest rates that could affect cash-on-cash returns.

To view the full report, click here: https://www.dbrsmorningstar.com/research/397313/cmbs-european-office-sector-and-the-impact-of-flexible-working

Source: BusinessWire