European Office Sector Outlook 2024

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Even with hybrid work models, offices will remain the primary workspace. High-quality offices with strong ESG credentials represent one of the most significant opportunities in today's market.

Even with hybrid work models, offices will remain the primary workspace. High-quality offices with strong ESG credentials represent one of the most significant opportunities in today's market, evident in the rising proportion of grade A offices being leased. Given real estate's nature as a long-term investment, it faces significant exposure to ESG-related risks. Consequently, ESG investing is shifting from being considered optional to becoming the standard approach in this sector. As investors grapple with elevated debt costs, the popularity of 'green loans' is on the rise. These loans primarily fund real estate projects dedicated to advancing environmental goals. Typically, the margins on green loans are expected to be lower in most instances. Supported by research conducted by Moody's⁸, sustainable project finance loans are considered less risky compared to non-sustainable projects. Due to the interpretive nature of green loans, however, there is a risk that loan terms could be susceptible to 'greenwashing'. The crux of the green washing problem⁹ is the difficulty in identifying it and the lack of standardisation – it therefore, requires a clear understanding of the true meaning of "green" and, in time, the establishment of industry-wide performance measurement standards.

In the long-term, office buildings falling short of established sustainability benchmarks pose a risk not just for the borrower but also for the lender. Across Europe, office markets face the potential of a substantial portion (76%) of office inventory becoming obsolete¹⁰ by the decade's end unless proactive measures are taken. There is widespread acknowledgment that the consequences of inaction may outweigh any upfront investment, or there is a risk that buildings are just left to go obsolete. Buildings and particularly office buildings have a role to play in generating a positive social impact¹¹. The changing culture of work provides opportunity. ⁸ Global Capital: Moody's finds evidence sustainable projects are less risky 9 Cushman & Wakefield: Greenwashing and the sustainability disclosure requirements 10 Cushman & Wakefield: European Obsolescence Equals Opportunity 11 Cushman & Wakefield: Re-working the Workplace

12 OFFICES OUTLOOK 2024

THE TIDE IS TURNING GREEN | 13