Sovereign Funds Already Lowered Direct Office Investments Before Pandemic and the WFH Experimental Shift

Posted on 12/26/2020

Fueled with oil sovereign wealth and the need for higher-yield, some gulf-based sovereign wealth funds roared into the core office market scene after the global financial crisis of 2008. Much has changed since then. After 2016, sovereign investors have paired away exposure in prime office assets in major metro areas, gradually opting for e-commerce related properties.

Commercial real estate is the next shoe to drop, as retail and malls have already been deeply impacted by the coronavirus pandemic and the government lockdowns. In the United States, some banks, credit funds, and other lenders have granted struggling property owners months of forbearance in a bid to avoid fire sales. Will that dynamic change?

The fundamentals of office work has changed. Companies are dropping record volumes of office space, increasing sublease inventory. Salesforce and Bank of America Corporation announced they will require less office space, as more employees could permanently work remote. Even the San Francisco bay area office market has been hit hard. As a wall of refinancings come due in 2021, how will lenders and borrowers value properties? How will sovereign wealth funds be positioned in these cases?

According to SWFI direct transaction data, sovereign wealth funds have slowed direct investments into office pureplays since 2016. The data in the chart below excludes fund commitments, open market purchases, REIT investments, and mixed-use real estate.

Direct Office Investments by Sovereign Wealth Funds excluding Mixed-Use and others

Source: SWFI Terminal,
Excludes: REITs, open market transactions, fund commitments, mixed-use properties, diversified real estate investments.

Essentially after 2016, sovereign investors moved beyond offices, increasing allocation to student housing, data centers, and industrial properties. In addition, some of the smaller sovereign funds and pension investors targeted offices before the COVID-19 pandemic in smaller tier cities.

Note: WFH stands for work-from-home.

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