The demand for data centres in the United States is rapidly increasing, driven primarily by the continued rise of cloud computing and the emergence of artificial intelligence (AI).
Office Sector
Major cities in the emerging global south are becoming more specialised in office-using sectors, which currently account for more than 30% of total city GDP across the world, generating more than $15 trillion in 2024, and employing over 165 million jobs.
Although Minneapolis added jobs in the first half of 2024 at a pace that exceeded the US average, it shed jobs in a number of office-based sectors. Industries that have added the most jobs over the last few quarters include state and local government, ambulatory healthcare, and social services.
We examined the disruption of generative AI at the US county level. We identified several metros – Atlanta, Denver, New York, San Francisco, and Washington DC – that had at least one county with the highest percent of displaced workers from AI.
The focus on green office buildings and sustainability is being driven by both government targets to achieve net zero and increasing corporate and investor focus on environmental, social, and corporate governance (ESG) considerations and compliance.
Our view remains that the most severe risks in commercial real estate are concentrated in the office sector, as it continues to deal with the pandemic-induced structural shift of increased remote and hybrid work.
Overall, the downturn in the property sector is much less severe than in some previous cycles, especially for residential property. This is good news for growth. Still, property sector risks haven’t gone away yet, especially in the troubled commercial real estate (CRE) area.
While we expect that sector selection will still be an important component to generating alpha in commercial real estate investment, we think the thematic drivers that are likely to support outperformance over the next decade will require more emphasis on selecting for geography.
The office sector in Australia is facing several headwinds, including reduced demand from hybrid working arrangements, slowing economic and employment growth, and rising bond rates and yields. However, it may still present an attractive cyclical investment opportunity with astute timing and management of vacancy and incentive risks.
Like many Midwest metros, Cleveland’s job growth has been tepid. Total job growth of 0.7% from Q4 2022 to Q2 2023 trailed the US rate of 1.1% in H1 2023. Job growth was led by construction, ambulatory health care, and hospitals.
Most metros are forecast to see low but positive total job growth through 2027, although the majority will incur slight job declines in the second half of 2023 to Q1 2024, in line with the US.
We believe the most significant policy measures to come through in the budget for residential building are the announced tax tweaks for build-to-rent (BTR) development.
We expect the structural shift to working from home to continue to negatively impact the US office sector over the long term. Our capital value forecast for all US offices by the end of the decade is 17% below 2021 values.
Cities with the most favourable demographics and with strength in the consumer- and office-based sectors are set to power China’s economic recovery in 2023 and record the strongest rates of employment growth.
We expect real estate values to correct sharply in 2023, but pressure should gradually alleviate as policy rates peak.
