Spotlight: Office Vacancy Rates

The property market is one of many asset classes available to individuals to invest in. Investing in property, however, doesn’t just mean buying houses. Other routes into the property market may include direct investment in commercial property through a specialist investment manager, or indirect investment via real estate investment trusts, otherwise known as REITs. Public REITs are companies that trade on a stock exchange and own a diversified portfolio of income generating property such as commercial real estate (CRE), which can include hotels, shopping centres and office buildings. Through purchasing shares in a REIT, investors can gain exposure to the diversified mix of underlying properties that the REIT owns, without the need to enter into long-term contracts as would be required with direct property investment. However, for investors with the appropriate expertise and time horizon, locking into long-term direct property contracts can pay off significantly and outperform REITs.
In Europe and the UK, several factors are currently impacting both the direct and indirect property market, particularly in the office and retail space. The most noticeable being the knock-on impact from COVID that saw a rise of online shopping and triggered a belief in the ‘death of the high street’. Paired with the hybrid working pattern that allows employees the flexibility to split their working hours between their homes and the office, a phenomenon that is likely here to stay, the office property sector is facing an uphill battle. The chart below shows the vacancy rates for different property types in the UK. 

Looking further across the pond to the US, these issues appear to be intensified. CRE as an asset class is highly ‘capital intensive’ meaning it relies heavily on large amounts of cash investments to keep it running. The recent US regional bank failures in early 2023 significantly impacted the US CRE market, as these banks are typically the largest lender for commercial properties, and therefore any weakness in the regional banking sector causes concern around the sustainability of CRE, given the potential cashflow implications. Inflation and rising interest rates have also negatively impacted the operational costs and profit margins of businesses, meaning cost cutting exercises are rampant. There is a looming question mark over how long demand for office space will remain with some of the largest renters of US offices, big technology companies and the Federal Government, (the single largest tenant of US office space) are all reducing their office vacancy rates in a bid to make cost savings. The ripple effect of this is a downward pressure on property values, a significant drop in property transactions in 2023 vs prior years and reduced availability of investors willing to invest in CRE.
On the back of this weakness, real estate returns have lagged the extraordinary equity market returns seen over 2023 and this trend may continue for some time. However, with downward pressure on prices comes attractive purchase points for experienced investors who can identify good value investments, and therefore opportunities remain in both the direct and indirect property market. Furthermore, the value of real estate is not directly tied to traditional markets such as bonds and equities and therefore an allocation to real estate, either directly or indirectly, can improve diversification within portfolios. The diversification benefit of real estate becomes even stronger as we consider the evolution of the real estate market, which has expanded over the years to now offer investors the chance to invest across a multitude of property types, all with varying economic sensitivities. By investing in a diversified portfolio of real estate, investors can spread exposure across these different property types and improve the diversification of their wider portfolio. A diversified investment portfolio is less prone to downside market movements in any one area and can be key to achieving positive outcomes with your money.


The Noise​

  • The US consumer price index (CPI) rose 0.4% last month, up 3.2% in the 12 months through February which was slightly above expectations. Higher costs for petrol and housing were the main contributors to rising CPI, suggesting some stickiness in inflation that could delay an anticipated June interest rate cut. Core inflation, which excludes food and energy costs also increased 0.4% in February, advancing 3.8% from a year ago. Market reaction to the data sent  Treasury yields up, while US equity markets opened slightly higher. This is the last major inflation report before the Federal Reserve meets next week, where policymakers are expected to hold interest rates steady.

  • English job vacancies have fallen to their lowest level in over three years per data provided by Reed Recruitment. The data showed listings for open positions fell by almost a quarter in the three months to February compared to a year earlier. Meanwhile, the number of applications on Reed’s site was up 20% from a year ago in February, indicating that more workers are fighting over fewer available roles. Office for National Statistics data validates this, as they showed UK unemployment edged up to 3.9% in the three months to the end of January. This will come as a relief to the Bank of England, as what was once a red-hot labour market appears to be cooling, which will boost the likelihood of an interest rate cut.

  • An official assessment conducted by the UK’s climate change committee revealed that the UK has failed to prioritise climate adaptation to risks such as floods and heat waves. This oversight will put British citizens and critical infrastructure at risk. Insufficient funding, poor government coordination as well as monitoring across departments were identified as reasons for poor adaptation. As much as £10 billion more per year may be required this decade to adequately prepare the UK for climate risks per the committee. Climate change poses a severe and growing risk to economic activity and infrastructure. February was the warmest on record globally, as well as the fourth-wettest on record in England. The rise in extreme weather events, such as heavy rainfall and warmer temperatures, put water supplies, transport, power, agriculture and health at risk.

The Numbers

GBP Performance to 14/03/2024

Equity GBP Total Return

1 Week








MSCI Europe






MSCI Japan



MSCI Asia Pacific ex Japan



MSCI Emerging Market






Fixed Income GBP Total Return


UK Government



Global Aggregate GBP Hedged



Global Treasury GBP Hedged



Global IG GBP Hedged



Global High Yield GBP Hedged



Currency moves












Commodities GBP return









Source: Bloomberg, data as at 14/03/2024

The Nuance

The UK economy rebounded in January after dipping into a mild recession in the latter part of 2023 per the Office for National Statistics. Gross Domestic Product (GDP) grew by 0.2% in January, following a fall of 0.1% in December. There was strong growth in retailing and wholesaling. Construction also performed well with house builders having a good month. This was in contrast with the subdued activity they saw for much of the last year. Though some believe that the mild recession that hit the economy at the end of last year is over, it is likely still too early to know for certain if the economy is out of a technical recession. GDP shrank by 0.3% in the final quarter of 2023 and 0.1% in the prior quarter.

The UK economy has been stuttering since its initial recovery from the pandemic, affected by a surge in energy costs and high interest rates. With inflation now down at 4% from double-digits for much of 2023, and forecast to return to its 2% target soon, the squeeze on household spending is easing and the BoE is starting to consider when to cut interest rates.

Wage growth data was also published this week, which showed British wages excluding bonuses grew at their slowest pace since October 2022. Wage growth was 6.1% in the three months to January, a downward surprise to the 6.2% that was expected. Though with inflation much lower than where it was a year ago, in real terms pay was up 2% compared with January last year.

Coming into this week the British pound had outperformed all but 11 global currencies in 2024. However, it gave up some of its gains following the GDP and wage growth data.


All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.

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