Reimagining Real Estate 2024

The outlook for commercial real estate varies significantly across property types, regions and submarkets, reflecting each sector’s unique characteristics alongside broader market trends. In recent years, performance has diverged across property types, with some showing resilience and others facing headwinds. The office sector has received the most attention with regard to demand shifts, as the complexities of changing work patterns reshape the use of office space worldwide. Return-to-office rates differ by region, with Asia leading and many US markets still recovering or stabilizing below pre-pandemic levels. Despite this variance, hybrid work models are prevalent, vacancy rates remain high in many areas and demand for traditional office space has weakened. However, newer office properties in key global hubs, with tenant-responsive amenities and that are well-located relative to transport, including in cities like New York, London, Singapore and Tokyo, continue to perform relatively well as they attract tenants who prioritize premium locations, sustainability and flexibility. These properties, often referred to as Class A, are considered “flight-to-quality” assets, offering amenities and configurations that appeal to companies seeking to enhance their office environments and attract and retain talent. Vacancy rates for these high-quality spaces are lower, and rental rates have been stable, driven by demand from firms looking to upgrade their workspace as part of a broader talent strategy. In contrast, Class B and C office buildings, which are typically older office properties with more limited amenities and at greater distances from transport hubs, are underperforming significantly. These properties often lack the modern amenities, environmental credentials and flexibility that today’s tenants demand, making them less competitive in the current market. Many of these older buildings are at risk of obsolescence, struggling with high vacancy rates and downward pressure on rents. In cities across North America, Europe and Asia, building owners are exploring alternatives, including conversions to residential or mixed-use properties, particularly in regions with high office supply and low residential availability. However, the feasibility of such conversions varies significantly depending on vacancy rates, building structures, local market dynamics and regulatory environments, with some regions facing challenges in adapting older properties due to zoning restrictions or high retrofit costs. The retail sector is also undergoing a nuanced transformation across global markets, which began years before the pandemic. Prime high-street locations and experiential retail spaces are seeing a resurgence, particularly in regions where consumers have returned to in-person shopping with a focus on integrated dining, entertainment and lifestyle offerings. Major urban centres like Paris, Hong Kong and Johannesburg are experiencing strong performance in these segments, as well-located retail properties adapt to provide experiences beyond traditional shopping. Community and neighbourhood shopping centres are another area of resilience – particularly in regions like the Middle East and Latin America – benefiting from their essential-service anchors, such as grocery stores, which attract consistent foot traffic. These locations have demonstrated stability, supported by a reliable customer base and growing demand for convenient retail options.1.2 An asset class view In recent years, performance has diverged across property types, with some showing resilience and others facing headwinds. Reimagining Real Estate: A Framework for the Future 9