According to a study published by Raiffeisen Switzerland on Thursday, the Swiss office market remains resilient. «Continued employment growth in sectors with a high proportion of office-based jobs, limited new construction activity and the increasing tightening of companies’ working-from-home policies are providing stability to the market,» says Fredy Hasenmaile, Chief Economist at Raiffeisen Switzerland.

The feared major correction has failed to materialise: advertised office space is now around 25 percent below pre-pandemic levels, while the vacancy rate in institutional portfolios, at 7,5 percent, is even lower than at the end of 2019.

At the same time, the market has undergone structural changes. Almost 40 percent of Swiss employees work from home at least some of the time. However, many companies are increasingly bringing employees back into the office, limiting the potential for reducing office space. In addition, office-based employment continues to grow, while construction activity for new office space remains very low.

AI Exposure Could Determine Future Demand

Raiffeisen’s experts see the increasing use of AI as the next major challenge and a potentially disruptive factor. Around two-thirds of office workers are employed in occupations with high to very high exposure to AI. At the same time, there has so far been no indication of widespread job cuts in office-based roles. Initial differences are emerging, however: occupations that are highly exposed to AI are developing more weakly, while jobs characterised by a high degree of human-machine complementarity are growing more strongly.

The study therefore examines five scenarios through 2031. The range extends from a 14 percent increase in demand for office space in a scenario dominated by productivity and employment gains to a decline of as much as 22 percent in the event of a pronounced automation shock. More moderate developments are considered more realistic: under the «AI as a tool» scenario, demand falls by just 1,6 percent.

Quality of Individual Properties Matters

According to Raiffeisen, office space is unlikely to suddenly become obsolete. However, the market is expected to become more selective. Location, quality, flexibility and the potential for alternative uses will therefore become increasingly important. Caution is warranted when it comes to new developments, while flexible usage concepts and the potential for future conversion are becoming significantly more important for existing properties.

Office real estate therefore remains an attractive investment – but no longer as a broad, undifferentiated asset class. The quality of the individual property will be more decisive than ever, the study says.

Home Ownership Offers a Cost Advantage

The study also examines developments in the residential property market. According to Raiffeisen, home ownership continues to offer a significant cost advantage over renting despite high property prices. Depending on the financing model and region, housing costs can be up to a quarter lower.

However, there are increasing signs that market momentum is slowing. «Demand is growing more slowly, marketing periods are becoming longer and the number of financed transactions has recently declined slightly,» says Hasenmaile. «While limited supply is likely to continue pushing prices higher, there are many indications that the strongest phase of price growth in the owner-occupied housing market is now behind us.»

Buy-to-Let Is Becoming More Challenging

Investing in buy-to-let properties is becoming more difficult. In recent years, such investments benefited from sharply rising property prices and low interest rates, allowing investors to generate attractive returns. Raiffeisen points, however, to significant concentration risks, including vacancies, rental defaults and administrative costs.

In addition, purchase prices for residential property have risen much more strongly than achievable rental income, putting initial yields under pressure. «New buy-to-let investments are now significantly more dependent on the interest-rate environment and future price developments. Anyone seeking to achieve long-term returns comparable with equities or indirect real estate investments must hope for continued and substantial capital appreciation. Given the expected slowdown in price momentum, however, such gains are by no means guaranteed,» says the bank’s Chief Economist.