Focus on: Commercial real estate
8 May 2020
There has been significant media attention on the long-term impacts of COVID-19 on retailers and shopping centre landlords, but there will likely be medium to long-term impacts on commercial office property too.
There is already pressure on commercial office rents as a result of less demand for office space, with some companies downsizing, a general focus on reducing corporate costs and where companies simply haven’t made it through current challenges. The key difference to the impact of past downturns is a potential long-term cultural shift towards working from home that may add further downward pressure on rents, or at a minimum, reduce rental growth prospects for office property.
There has long been a trend towards more flexible working arrangements, including employees working from home. The current situation – where it is necessary for office employees to work from home for health and safety reasons – has been a major cultural shift for many companies. Whilst many of us are looking forward to enjoying the company of our colleagues in the office again, there may be a more permanent shift towards employees working from home and greater acceptance of flexible working arrangements. For some companies, this may prompt a rethink of how much space tenants require and the best utilisation of that office space.
In the short-term, the ability for companies to implement effective social distancing protocols for office staff will be in question. Accounting and large property firms have been at the forefront of hotdesking or ‘activity-based working’ for some time. These office layouts are designed for collaborative working and sharing work spaces. However, with the need for social distancing and increased hygiene standards as set out in the new workplace safety protocols released this week by Safe Work Australia, hotdesking will be unacceptable in the near term. Companies will need to revisit their way of working as collaborative meeting space becomes less useful.
Commercial landlords will need to work with their tenants to help manage this transition and time will tell how this may play out. For example, landlords may take the opportunity to offer refit incentives for an extended lease term. Although it will take some time for tenants to understand how their space needs may change, there will certainly be a focus on corporate costs including real estate, and more limited growth driving the need for additional office space, which will impact rental growth prospects and ultimately office property valuations.
On the supply side, there are a considerable number of new office developments expected to be completed in Australia’s CBDs. Almost 1 million sqm of space is expected to come onto the market in the next two years, with more than half of that adding to office stock in Melbourne. Whilst the vacancy rate in Sydney and Melbourne – Australia’s two largest office markets – is currently less than 5 per cent, we expect that this may climb based on the impact of COVID-19 on demand, adding to the pressure already on rents due to significant additional supply. In the years following the global financial crisis, vacancy in these two core markets climbed as high as 10 per cent but it took a few years for leases to roll off and for this impact to be felt.
Kylie Ramsden is Partner, Investor Relations at GRACosway and leverages more than 20 years’ corporate experience in investor relations and finance related roles. Kylie offers particular expertise in real estate, having spent most of her career in the real estate sector working across various roles including leading the investor relations function at some of Australia’s leading property groups.
For further information about this note or to discuss your organisation’s requirements, please contact Kylie on +61 412 340 850 or Contact Us