Office Asset Optimisation

ADDRESSING THE COST CONUNDRUM

It is against this backdrop of structural change, that cyclical pressures have become more acute

It is acknowledged that budgetary discipline has always been important, but during the previous cycle undertaking capital works was financially easier. As capitalisation rates continued to compress, capital expenditure programmes could be more readily written off against the increasing value of the asset. Asset owners are now facing a reverse paradigm, where assets are becoming increasingly expensive to operate as well as potentially requiring significant capital works at a time when debt is expensive and asset values are falling. Arguably the questions around structural changes are most prevalent in the office sector, which has generally resulted in stronger yield decompression compared to other sectors. Accordingly, there is greater pressure for office owners to innovate and provide adequate responses to keep their asset(s) relevant to the market. Competition to secure tenants is forecast to intensify given the forecast net new supply of almost 8.5 million square metres through to the end of 2026 compared to forecast net demand of 7.3 million square metres.

Increasing sustainability regulatory compliance, albeit at varying speeds across the region, are an imperative to upgrade asset quality for some landlords, though tenants will continue to compare potential office space locations against their competitor set. This means all asset owners will need to establish a schedule of works specifically for sustainability. However, such works should form part of wider capital and operational expense planning. This does not always involve large scale works, but can be small-scale projects such as hosting community events, providing flexible work spaces or organising group wellness activities. The message here is that while there are likely to be periods when substantial capital expenditure

INPUT COSTS

RUNNING COSTS

ASSET VALUE

OFFICE ASSET OPTIMISATION FOR TOMORROW

• OFFICE

• OPERATIONAL EXPENDITURE HAS RISEN 10-20%. • PRIME RENTS IN

• COST OF DEBT HAS RISEN 350-400BPS • CAPITAL EXPENDITURE HAS RISEN 20-25%

CAPITALISATION RATES HAVE SOFTENED BY 90BPS SINCE Q1 2022

EUROPE HAVE RISEN BY 15% ON AVERAGE OVER THE LAST 5 YEARS.

CUSHMAN & WAKEFIELD

is required, it should be part of an ongoing plan of continuous improvement of the asset.

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