Is the Market Ready for a Comeback?
Our second report focuses on the office sector. After several years of recalibrating to more hybrid/remote work, ultimately resulting in weaker demand for space in some but not all markets, the tide is finally turning for the office sector. As recovery in the office investment market starts to gather momentum, we focus on three key themes to help real estate investors identify opportunities.
Strengthening Demand Engines
Asia Pacific is expansionary across numerous metrics including: (i) economic growth at a little shy of 4%; (ii) almost 68 million jobs, of which over 16 million are office-based, created in the past 5 years; and (iii) disposable household income growing at around 4%. These all point to solid demand fundamentals, which are further supported by high levels of in-office attendance. Across Greater China and North Asia, office attendance rebounded quickly and sits comfortably above 80%. Elsewhere across the region, occupancy levels vary but for the most part sit at around 70%.
This has resulted in almost 410 million square feet more Grade A office space being occupied across Asia Pacific as at the end of Q1 2025 compared to the end of 2019. In relative terms that is a 27% increase over 5.25 years. Of course, a lot of this has been driven by the region’s largest and fastest growing markets, many of which are found in India, although significant expansion has also occurred in Seoul and select parts of the Chinese mainland. In fact, in looking at the region’s 39 office markets that we track, all bar one have shown an increase in occupied Grade A stock over the same period.
The office demand outlook remains strong. The Asia Pacific region is expected to create a further 14 million office jobs by the end of the decade. Moreover, given that businesses have already recalibrated to hybrid workplace strategies, if that was their intent, each office job created from this point forward is expected to yield greater demand for space relative to what was observed over the last few years.
Investment Returns Outlook
Total return profiles comprise capital and income growth. In analysing the former, office yields have softened across the region, though to varying degrees, with expansion of around 150bps in Australia but only 25bps in Singapore. However, for the most part, these declines are over as yields are forecast to remain stable through 2025, with the potential for yield compression into 2026 as further interest rate cuts occur. The spreads 10-year bonds also present a mixed picture. On the one hand they have doubled compared to recent lows, but given the more limited expansion in property yields to bond yields, current margins sit at the lower end of longer-term averages since 2010. However, these longer run averages do include a sustained period of interest rate reduction when office yields proved more sticky.
While we are positive towards the impacts of the current rate cutting cycle, we are also cognisant that terminal rates – or the interest rate where policy ultimately settles - will likely be higher than the previous cycle, indicating more limited scope for yield compression, meaning that investors should place a greater focus on net operating incomes.
Almost half of the region’s office markets have posted rental growth over the past year, though nearly two-thirds have higher rents now than five years ago. Unsurprisingly, there is considerable variation in rental outlook between markets, and still a good amount of supply to work through, though rent growth is generally expected to pick up across the region over the next 2-3 years.
Beneath these broad trends, there is considerable variation within markets and sub-markets. For example, year-on-year growth in Tokyo’s 5 Central wards in Q1 2025 averaged 4.5%, but with a range of 1.2% to 13.4%, some 14.6 percentage points. Other examples exist, such as “green premiums”, evidenced at 14% and up to 12% in Shanghai and Singapore respectively. Similarly, our research shows that improving an asset from “average” to above average in Sydney has been associated with a 5% improvement in vacancy and a 7% rental uplift. Together, all this points to the need for careful asset selection and active asset management to drive outperformance.
Sector Liquidity
It should not be forgotten that the office sector remains the mainstay of investment into the region’s commercial real estate sector. While the proportionate share of office investment in APAC has declined from a recent high of 46% in 2019 to approximately one-third of total investment in 2023 and 2024, it still remains the most traded asset class by volume. In comparison, in 2024 logistics and industrial investment accounted for 25% of the total (excluding data centres) and retail sat at 19%. The rise of Alternatives should not be discounted; though still nascent, they are growing in importance to the investor landscape, with data centres accounting for 11% (including AirTrunk) and multifamily at 6%. Overall, this reflects that changing landscape of investment across Asia Pacific, with the rise of other sectors providing opportunities for investors both within and outside of the office sector.
In short, the office sector remains a significant avenue for capital deployment, which is reflected in asset allocation profiles. According to ANREV, investors in Asia Pacific have the highest allocation to offices, at 38%, compared to Europe (32%) and the U.S. (13%). If this allocation broadly prevails, it suggests there is around USD20-25bn of unlevered, institutional, dry-powder capital targeting the office sector as at the start of 2025. As interest rates continue to trend downwards over time and support the investment thesis into commercial real estate, we expect fundraising activity to increase with the office sector remaining a key target of investors in the region.
