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Demand for office space in a post-COVID Australia

Sydney CBD office buildings
4 min read
The demand profile for CBD office buildings has changed as a result of the pandemic, but is not likely to disappear. Photo: Shutterstock

Demand for office space in a post-COVID Australia

COVID-19 has changed the landscape for office landlords in Australia, but while many have moved to a new balance between working from home and in the office, traditional CBD settings are likely to remain crucial for corporations.

Before COVID-19, Australia’s domestic office market was in the midst of a decade-long period of expansion. 

Capital values and rental growth reached unprecedented levels. Australia’s two largest markets, Sydney and Melbourne, recorded their lowest vacancy rates in 30 years (5.0 per cent and 3.4 per cent) at the end of 2019.

The medium-term outlook for the market was strong, but as for many industries, COVID-19 served as a circuit breaker. 

Governments around the world implemented strict lockdown and social distancing measures. Many office employees faced extended periods working from home. 

Naturally, this shift has raised questions about the market’s short to medium-term outlook, and the utilisation of office space moving forward. 

The impact of COVID-19 

COVID-19 accelerated a lot of the long-term structural trends that the office sector was already experiencing, including employees working remotely. 

We expected occupier demand to reduce, given the impact of a recessionary environment on the labour market. 

Floor space requirements from tenants were also expected to decrease, depending on which industry, as working from home (WFH) became more prevalent. 

In 2021, potential risks associated with the gradual withdrawal of stimulus measures, like JobKeeper and rent abatement schemes, were expected to lead to soft rental demand. 

However, management of the pandemic has since improved, with increased vaccine rollouts and declining cases. In Australia, confidence has increased and people are returning to the office, albeit slowly.  

Despite this, businesses are adapting to allow a certain percentage of staff to continue to work from home part-time.

Sublease space remains elevated, but this is considered by many to be a ‘reactionary’ and is likely to decline as overall sentiment improves. 

While growth in the business and consulting sectors is expected to be more subdued, government, technology and healthcare sectors are expected to drive demand. 

These sectors are looking for high-quality tenancies with strong sustainability ratings, while government transition to better quality space will be a benefit for higher-grade office assets. 

Working from home 

It is anticipated that an average of 50 per cent of the workforce could be WFH at least two days a week in the post-COVID environment. 

This could result in a reduction in floor space for some tenants. 

The severity will depend on the quality and duration of the asset’s underlying lease profile. 

Older assets with shorter lease expiry profiles are more likely to be discounted due to the short-term impact to the occupier market, while newer longer leased assets will be less impacted. 

That being said, re-pricing seems to be a short-term measure, if anything. 

As the structural risks arising from the impacts of WFH become better understood, we expect better quality assets to become more resilient. 

Leasing activity has demonstrated resilience at the start of 2021, bolstered by news of a vaccine rollout and the easing of quarantine restrictions. 

Future demand for office space 

Longer-term office demand is correlated to population growth and urbanisation. In a post-COVID environment, population growth is forecast to continue increasing and still forecast to reach circa 32 million by 2040. 

This would see more than six-million square metres of additional office space demand over the next 20 years (based on long-term historical correlation), bolstered by increases in white-collar employment driven by shifts towards greater service-based sectors. 

In addition, there may be a de-densification in response to physical distancing requirements, which could see workspace ratios increase (currently one worker per eight square metres, and could increase to one worker per 10sqm to 12sqm). 

The increased adoption of working from home may change how the office is used, however it is unlikely it will impact the need for a centralised space for staff.

The enduring role of the office 

Australia’s COVID-19 response has, for the most part, been successful. 

This relative stability has enabled firms to make more decisive real estate decisions and ensured the office environment remains a relevant part of business models. 

Human interaction and collaboration will always be the key reason for coming into the office, allowing business to build culture and maintain social and professional networks.

Surveys and research have shown that the majority of employees view face-to-face collaboration as preferable to working from home. Offices enable more spontaneous interaction between employees and provide opportunities to build and maintain social and professional connections. 

The development of company culture is hindered while people continue to work from home full time – impacting younger employees with limited workplace experience. 

Maintaining a physical office in a CBD location has proven to be the most productive solution for knowledge-based industries such as the legal and finance sectors, as companies generally benefit from clustering together. 

Post-COVID, the office is expected to remain a key part of any future workplace ecosystem, though the utilisation of the space may change from a mandatory everyday destination to a hybrid of WFH and being in the office.

Overall, in Q4 2020, the market recorded a 3 per cent increase in the number of leasing enquiries and a 9 per cent increase on area requirements compared with Q4 2019 – a positive trend despite a challenging market environment. 

There also has been increased leasing activity in Q1 2021, demonstrating improving sentiment. 

We are of the view that COVID-19 accelerated a growing trend. This does not mean a permanent shift from office space, but the increased adoption of flexible work solutions.

The outlook for office space

While the full impact of WFH on the office sector is currently unknown, we are of the view its medium to long-term impacts will be less detrimental than initially thought. 

Office space will remain critical for business operations, as occupiers and landlords alike view the office as a place to nurture collaboration and culture, along with promoting a beneficial work-life balance and sense of belonging among employees. 

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