Manulife Financial Corp. is facing a divided global office market, with the value of its U.S. office investments having plummeted by as much as 40 per cent from a pre-pandemic peak, according to Chief Financial Officer Colin Simpson. 

The North American market has been deeply impacted by the shift to remote work, with U.S. office vacancy rates surging to a record 19.7 per cent at the end of last year. This stands in contrast to Asia, where office buildings are relatively full, Simpson said in an interview.

“I like to think our property portfolio is of reasonably high quality and quite resilient, but the structural forces of higher interest rates and trends around return-to-office make it a difficult market,” he said.

The worst may be over for the downturn in office property values, said Simpson. But he warned that advancements in artificial intelligence may erode white-collar employment, stifling any potential rebound in demand for desks.

The Toronto-based life insurer reported a 12 per cent year-over-year decrease in the value of its income-producing commercial office properties globally, which totaled $4.83 billion (US$3.56 billion) as of Dec. 31. Including minority-ownership in certain real estate funds, Manulife had $6.3 billion in global office holdings last year, about a quarter of which are in the U.S. 

North American office investments represented about 40 per cent of Manulife’s portfolio of alternative long-duration assets a decade ago, Chief Investment Officer Scott Hartz said during a February earnings call. That figure has now dwindled to about 10 per cent, owing to the growth of other investments and the divestment of some office properties. 

Manulife doesn’t anticipate significant sales of its office properties amid the market slump, Simpson said. “Would we look to increase the exposure at this point in time? Absolutely not,” Simpson said. “Is there a vibrant liquid market we could sell into and realize a lot of value? No.” 

As a life insurer, Manulife has a rare luxury among investors of being able to retain its holdings without the pressure to refinance at unfavorable rates or incur big losses on buildings sales, thanks to the absence of mortgages on virtually all of its properties.

However, the company faces inherent conflicts as both a major North American employer of white-collar professionals and an owner of commercial office spaces. 

Manulife sells insurance and retirement products in the U.S. through its John Hancock unit and owns that company’s iconic headquarters in Boston. That property has declined in value, in part because John Hancock itself needed fewer floors after the pandemic, Simpson said.