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Manulife faces 40% decline in U.S. office investments from peak

Manulife Financial Corp. finds itself navigating choppy waters in the global office market, with its U.S. office investments seeing a steep decline of up to 40% from their peak before the pandemic, as revealed by Chief Financial Officer Colin Simpson.

The landscape in North America has been profoundly affected by the widespread adoption of remote work, resulting in a record-high office vacancy rate of 19.7% by the end of the previous year. This stands in stark contrast to the situation in Asia, where office spaces remain relatively occupied, Simpson explained in a recent interview.

Despite Manulife's confidence in the quality and resilience of its property portfolio, Simpson acknowledges the challenging market conditions shaped by factors such as rising interest rates and the evolving trend towards returning to physical office spaces.

While there are indications that the worst of the downturn in office property values may be behind them, Simpson cautioned about the potential impact of advancements in artificial intelligence on white-collar employment, which could further dampen demand for office spaces.

According to reports, the Toronto-based life insurer recorded a 12% year-over-year decrease in the value of its income-generating commercial office properties globally, amounting to $4.83 billion (US$3.56 billion) as of December 31. When factoring in minority ownership in select real estate funds, Manulife's global office holdings stood at $6.3 billion last year, with approximately a quarter of these investments located in the U.S.

Chief Investment Officer Scott Hartz noted during a February earnings call that North American office investments once represented about 40% of Manulife’s portfolio of alternative long-duration assets a decade ago. However, this figure has since dwindled to around 10% due to the expansion of other investment avenues and the divestment of certain office properties.

Despite the market downturn, Manulife does not foresee significant sales of its office properties in the near term. Simpson emphasized that the company has no intention of increasing its exposure to office investments at this juncture, given the lack of a vibrant liquid market to capitalize on.

As a life insurer, Manulife enjoys a unique advantage over other investors, as it is not compelled to offload its holdings to mitigate losses or secure favorable refinancing terms, owing to the absence of mortgages on the majority of its properties.

However, the company finds itself in a delicate position as both a major employer of white-collar professionals in North America and a significant owner of commercial office spaces. Simpson highlighted that the decline in value of John Hancock's iconic headquarters in Boston, which Manulife owns, is partly attributed to the reduced space requirements of the subsidiary following the pandemic-induced shift in work dynamics.



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