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* Shortage of supply helping European office market
* Post-pandemic working could increase demand for space
* Europe outperforming United States, attracting U.S.
investors
By Carolyn Cohn
LONDON, July 6 (Reuters) - After more than a year of home
working, property investors are betting that demand for office
space in Europe will rise as COVID-19 vaccinations are rolled
out and people return to work.
Global office real estate leasing volumes dropped 31% in the
first quarter compared with a year ago, according to real estate
broker JLL, although Europe proved more resilient than the
United States.
"The perception that the office is over is complete
nonsense," said Keith Breslauer, managing partner of European
property investor Patron Capital.
"None of the smart money believes it."
Breslauer worked on three new office development
opportunities in British regional cities on one day last month.
"We weren't alone," he said.
The long-term impact of the pandemic on working patterns
remains unclear.
Banking firm HSBC plans to nearly halve its global
real estate, while consultancy Deloitte has told its UK staff
they can work wherever they want. U.S. banks such as Goldman
Sachs and JPMorgan have ordered employees back to
the office.
"Some will expand and some will contract, some won't change
at all," said James Corl, head of the private real estate group
at U.S. investment manager Cohen & Steers.
"The wake of economic downturns always provides the best
investing opportunities."
Corl said a rise in hybrid working -- from the office a few
days a week and the rest at home -- is being counterbalanced by
the need for more office space per person in an age of social
distancing.
A supply shortage that pre-dates the pandemic is also
supporting prices even though companies may need 20-30% less
space, investors said.
Simon Martindale, fund director at Mayfair Capital, said the
real estate manager was arranging a large regional office
letting in Britain for a "big corporate" seeking extra space.
The pandemic has hurt large firms in Europe less than
initially expected -- helped by strong government support -- and
most have continued to pay rent, analysts and brokers say.
U.S. centres such as San Francisco and New York have not
been so resilient -- possibly because venture capital and
private equity tenants are less able than multinationals to take
on new leases, said Matthew McAuley, director, global research
at JLL.
Investment transactions dropped sharply due to the pandemic,
brokers say. But where deals have taken place, prices for
offices in Europe's central business districts have risen 13% in
2021 from 2020, according to Real Capital Analytics, while
comparable U.S. transaction prices have fallen.
U.S. property investors are increasingly interested in
Europe, industry sources say.
"A number of overseas investors (are) willing to visit
London and quarantine in order to inspect and bid on buildings,"
real estate broker Savills said recently.
New York-listed Kennedy Wilson last week bought an
office block close to London's U.S. embassy for $252 million --
above a roughly $222 million reported price for an aborted sale
of the building in 2019.
LOCATION, LOCATION
For Britain, the "double storm cloud" of Brexit and COVID-19
is clearing, said Ronald Dickerman, president of property
investor Madison: "We are very, very bullish on the UK recovery
and London."
Madison, an investor in Capital & Counties, owner
of London's Covent Garden shopping district, last month bought a
minority stake in the 37-storey Salesforce Tower in the City
financial district.
RE Capital plans to spend up to 150 million pounds ($208
million) on central London offices this year. It bought a
building in Westminster, close to Britain's parliament, last
year.
"When you look at deliverable supply in the next few years,
it is very constrained," said Simon Banks, RE Capital's head of
UK real estate, adding "location is ever more important".
Employees may prefer to be near mainline rail stations as
they remain cautious about buses or the metro, for example.
David Greenbaum, CFO of central European property firm CPI,
said the pandemic had not changed its approach to the office,
which makes up more than 50% of its portfolio.
Staff who were enthusiastic about working from home last
spring are now missing out on training and collaboration
opportunities, and the desire for home-working was likely to
wane, he said. "The pendulum always swings."
Vacancy rates remain very low in cities like Berlin, he
added, underpinning the market.
Rents rose by around 2% in the first quarter for prime
Berlin offices compared with a year ago and by more than 5% in
Paris, while London's West End was stable, according to CBRE. In
New York's mid-town, with more unoccupied space, rents fell by
more than 5%.
WAREHOUSE WOES
Investor interest in offices is increasing as logistics --
warehouses -- starts to look expensive.
"Yields in logistics have dropped 300 basis points in five
years, from 7-9% to 4-6%. It's very hard to make money in this
space," said Patron Capital's Breslauer.
Logistics firms are struggling with the costs of last-mile
delivery, encouraging trends such as pick-up points in Amazon
Fresh stores and fast delivery grocery services with smaller
city-based distribution centres, sources said.
Those changes, and a return to normal shopping, could put a
lid on the sector.
"There's so much money chasing one asset class," said
Zachary Gauge, European real estate analyst at UBS.
"I find logistics a bit concerning."
($1 = 0.7224 pounds)
(Reporting by Carolyn Cohn
Editing by Rachel Armstrong and Catherine Evans)
