Bad news for commercial property

Earlier this month, The AFR reported that commercial vacancy rates were swelling across Australia’s CBDs:

Office vacancy rates in the Sydney and Melbourne CBDs are more than double what they were a year ago, raising the prospect that some towers could drop in value by as much as 15 per cent as rents also fall.

With business confidence blunted by uncertainty during the pandemic, demand for space has faltered. Supply has effectively exceeded demand, with a negative net take-up of space of 193,700 sq m during the third quarter, according to figures compiled by JLL.

The RBA’s latest Financial Stability Review (FSR), released earlier this month, noted the sharp rise in vacant rates across Australia’s capital cities, alongside the risk of heavy investor losses:

Demand for office space is expected to decline in the near term given staff working from home and reduced economic activity, and potentially in the longer term as businesses reconfigure how they work. Secondary-grade offices appear particularly vulnerable to falling demand, as tenants are often enticed by lower rents during downturns to upgrade to better premises. At the same time, an above average volume of new office buildings will have been completed in Sydney and Melbourne in 2020, increasing supply. While most of these new buildings have pre-committed tenants, it will put further pressure on vacancy rates in second-grade buildings…

Given the deterioration in rental conditions already underway, office and retail property prices could fall sharply. Investors could substantially re-evaluate risks and pull back demand, which had contributed to strong office price growth over the past decade, particularly in Melbourne and Sydney (Graph 2.7). Similarly, the economic downturn is likely to accelerate the contraction in retail property prices…

Commercial Property

In a worrying omen of what is to come, a Fortune survey of American CEOs reveals that more than three quarters believe they will need less office space in the future due to the work from home (WFH) phenomenon:

The rebellion has already started in Sydney, with many workers reluctant to return to the office:

Recent surveys show a sharp rise in the share of Sydney employees who want to work remotely in future…

Professor Rae Cooper, an employment relations expert at Sydney University’s Business School, expects many employees will push back against a full-time return to the office after demonstrating their productivity while working from home.

“I think the rebellion will happen if there is no accommodation of the needs of people for flexibility,” Professor Cooper said.

“Employees have shown they can make it work well and productively for businesses and I would be very surprised if people aren’t out there asking for these kinds of measures as a regular part of their jobs.”

Independent economist Terry Rawnsley says the workers “rebelling most” are those with long, expensive commutes.

As expected, the rent-seeking Property Council wants to force workers back into CBDs to bolster demand for office buildings:

But Ken Morrison, chief executive of the Property Council of Australia which represents many office building owners, said offices would continue to be a big driver of business productivity, collaboration and culture.

“If we’re to get the economy going again, we’re going to need thriving CBDs,” he said.

“Supporting the return to offices will be an important part of the recovery process. That’s why governments have an important role to play in showing leadership by encouraging Commonwealth and state public servants to return to the office, along with private business.”

Suck it up Ken. Workers would prefer not to waste time and money commuting to/from the CBD. So why make them?

Whether you like it or not, the WFH phenomenon will very likely continue post-pandemic, meaning less demand for goods and services in the CBD, as well as office space.

On the flipside, there will be offsetting gains to activity in the suburbs, as economic activity is dispersed.

Bringing jobs to where people live is exactly what the economy needs.

Unconventional Economist
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  1. Holiday In ScomodiaMEMBER

    Rebellion going pretty good so far here- after months of high output, great work life balance working from home in my online phone/web support based role I was told to move back to the office as it was managements ‘preference’ (no actual reason given- suspect a few old managers just needed to feel important/keep bee watching to justify their existence)- so went for a new job elsewhere that was offering full time WFH, when my manager got my email for a ref check she countered with half week WFH, pay rise 2 grades and contract extension. Those organisations that cant get with the WFH program to keep performers happy deserve to attract only the dregs and fizzling into nothing.

      • Holiday In ScomodiaMEMBER

        Yep- talking to friends in similar roles, including gov, there is plenty of pretty dead wood mid management types pottering around the office booking ‘meetings’ to fill the time apparently….

        • It’s already been said many times between the lines right across government and big business. Australia will be going back to work.

        • There’s going to be a tonne of redundant sociopaths, err … I mean management types, …. looking for new careers.

  2. boomengineeringMEMBER

    One solution would be to convert half of the office space to industrial which as yet hasn’t felt the pinch and the other to residential to house those industry workers. Offices no longer need close proximity whereas factories still benefit from close proximity to suppliers and interconnection of other industries. A lot of WFH office work will be outsourced to India with no inhibiting time nor freight but factory products imported takes time and transport costs.
    The Industrial Revolution started in the Zaan district of The Netherlands in 1592, and all factories were in close proximity for a reason.
    Killing Australian manufacturing has now been seen as a mistake as per the push for subsidized apprenticeships.

    • Industrial? Factories? surely you jest. Oh… I get it, you mean those factories and industries that are used for making houses/apartments and printing real estate agent signs. I guess we do still have those sectors.

    • If only they addressed the reasons industry is so prohibitive in this country instead of pushing more apprentices into the market

    • We vacated CBD office space after the virus hit.
      If our clients could magically transport in from overseas, we’d need 2 hours to bring them up to the tenancy (2 per lift), then another 2 hours (back down) for snacks / lunch, followed by 2 hours back after the meal break, and 2 more hours to leave the building at end of hours.

      8 hours done.

    • Already happening
      Had missus 50% of super in an infrastructure component that was doing ok +4% The fund amalgamated the Infra with their Property portfolio on Oct 1, and pancaked it straight to -1%

  3. Tremendous article Leith. Thank you.

    Lets hope Ken Morrison of the Property Council of Australia is informing his members of the University of New South Wales study …

    … and the looming massive office space glut … and CBD flight …


    APS managers won over by working from home … Judy Skatssoon …(Australian) Government News

    A survey of more than 6,000 Australian Public Service employees, including nearly 1,400 managers, has found that working from home has been an ‘overwhelmingly positive’ experience.

    The study suggests that making employees go back to the office full time could erode some significant gains, researchers say.

    They outline their findings in a report titled Working during the Pandemic: From Resistance to revolution.

    The report found that managers were highly supportive of working from home, representing a major mindset shift. … read more via hyperlink above …
    Working during the Pandemic:: From resistance to revolution? … University of New South Wales (Canberra) pdf
    … google search title if url below fails … – Working From Home Report_Final (1).pdf

  4. How long are consumers going to tolerate paying top dollar for absolutely everything, calling company xyz to be told…”no sorry, they’re working from home today”?

    I reckon if it remains as inefficient as it is today (for the consumer, not the overpaid corporate dick), everyone will be going back to work.

    My view is they should be anyway, and as I’ve predicted for months, government and business will force them to. This is just the start, and IMO, most Australians support it.

    Why would anyone want to mix work and home? Undo work vibe and relationships? Who would want to be in a house while their partner is working talking garbage on the phone all day?

    It’s not healthy for our society.

    Get back to work. In the office.

    • In a proper IT/telecom setup the customer calling will not even notice whether a company rep is working at the office or at home, everyone will be reachable …. Companies using the excuse someone is working from home home haven’t arranged their systems properly yet, but the work from home thing really is here to stay. It will never get back fully to how that was.

      So indeed, cheaper office rents coming 🙂

      • boomengineeringMEMBER

        My missus wants me to retire as she’s sick of the WFH steel swarf in her feet when she goes into the ex granny flat converted to machine shop. Will have to move the computers out and lock her out but have to wait for the boomerang to move out of his room first.

    • So a customer is calling a company using a device that allows them to speak to people from one location to another but it only works in offices?

      TIL people work from home dont have soft phones/mobiles

      • It’s not just about inability to contact them.

        When you do, they don’t have the answers you need. Not everything is on line, nor can be.

        Why should I be inconvenienced while paying top dollar, while they’re earning top dollar?

        Mark my words. Most of Australia is going back to work. Government will very soon require it

        • So dont pay top dollar for poor service?

          You are the same bloke to parroted that if people can work from home they can be off shored but now you are telling me that people work from dont/wont answe the phone and you wont pay top dollar for it, but you will pay top dollar for some bloke in India to answer the phone?

          You are legit all over the shop.

          • I didn’t say they won’t answer the phone. I implied the information I needed they couldn’t give me because of their location. So, two scenarios. They need to be in the office to be effective. If not required, do it from India.

            Just to be clear, are you seriously telling me a business will pay 10 times wages to an Australian if their job can be done from home, ergo, the Philippines?

            With regard to your overall view, I think you might be focusing on the job you do, as opposed to what broad Australia does.

            BTW, I have no skin in the game. I don’t care. I’m merely saying what I see unfolding and I’d put money on it that I’m right.

      • There has been a systemic offshoring of front line services to the Philippines and other continental locations, but now there has been a pandemic companies supposedly suddenly cant operate with people in remote locations….

    • What decade are you living in? Technology allows for easy transfer of comms to mobile or desktop and any organisation that relies on physical paper files to access information is not they type of organsiation where one could WFH anyway.

  5. Friend of a friend is a senior partner at a large Sydney law firm, maybe Allens.

    They were looking at moving offices pre pandemic but their current landlord has come back and offered a 5 year extension with 2 years rent free – that’s a 40% discount!

  6. WFH:
    – lower overheads
    – higher worker productivity

    Yeah, it ain’t gonna go back to whay it was

    • Higher worker productivity?

      The exact opposite to what I’ve observed.

      Office space declining values, city businesses collapsing, toll roads, taxes, donors, debt, etc etc say everyone is going back to work. For the same reason we have mass immigration. The elites make the rules for their benefit not ours.

      • Shades of MessinaMEMBER

        Not all the elites.

        A mate works for a global MNC in Asia and they have just shed two floors of prime office space which apparently saves them $5 million a month. $60 million per annum times multiple locations globally is a lot of cashola back into exec bonuses.

        The company was apparently very resistant to WFH but after 6 months with no drop off in staff productivity they reckon it’s a no brainer to push office costs back onto staff WFH.

        • Hes clueless, my company had already reduced its CBD floor space by 30% precovid (2019) on the assumption that so many people would be working from home a few days a week with most of the remaining space having been converted to “activity-based” seating, i,e come in and find a desk on the days you do come in.

          All covid has done is speed up the change.

          • Clueless because I have a different perspective and experience to you? Wow.

            Care to place a sizable bet?

          • Remembering everything we know about who runs Australia.

            From article above…..“Supporting the return to offices will be an important part of the recovery process. That’s why governments have an important role to play in showing leadership by encouraging Commonwealth and state public servants to return to the office, along with private business.”

          • You may be right in the context of your experience but in the general trends that were around before COVID and whats happening now you appear clueless.

            There are many business that cant work from home, like coffee shops, or Mechanics etc. But the overall majority of high end commercial office space is occupied by organisations that have been wishing to downsize their footprints and have all the processes in place to operate this way. Most were concerned productivity was going to drop among other issues but COVID has given them the excuse to test the waters.

            Even if productivity has dropped by 10% it will be offset by the reduced office costs and potential drop in wages due to the WFH scenario…

          • “You may be right in the context of your experience”

            Correct. That’s what my view is based on, along with what politicians, some big business and lobbiests are saying.

    • truthisfashionable

      My extended team were asked to do 1 day a week back in the office for a month and see how we went. Talk about unproductive; the commute, the coffee runs, the made up meetings and catch-ups, the all in meetings, the lunch break, the afternoon break then the commute home to log on and actually complete what needed to be completed.

      Fortunately the 2 up manager was also experiencing the same waste of a day and promptly put us back to WFH 5 days.

      • The people that make the rules have been implying we’re going back to work for many months. That March to now, is just temporary.

        • The same out of touch people who think cheap apprentices will rebuild the industrial sector, who think the best way to improve housing affordability is to increase the costs… You mean these people?

          When owners of businesses decide they dont want to spend the extra money on office space we wont see any change from what we do know.

          • Never forget. Follow the money. It’s all about power and money. Always. Always. Always.

            Business might want to save ABC dollars saving on rent, but government will withhold 2 X ABC dollars in contracts, or charge them more tax if they do it.

            “cheap apprentices will rebuild the industrial sector, who think the best way to improve housing affordability is to increase the costs”

            They don’t think anything of the kind.

            It’s always about power and money. Always Always Always. No exceptions. Ever.

            I’m not saying everyone is going back to how it was in February, but I’m categorically saying it is not staying like it is now. Absolute zero chance.

          • No one has said it was about staying the way it was. Things have fundamentally shifted, Businesses operating Office style business have now seen the light in terms of WFH and productivity and as a result are extremely unlikely if they have any sense returning to the full time work from office arrangements. No amount of government pressure will change this direction as long as businesses see advantage in it. Maybe if they made a tax ruling that turned WFH into an FTB issue for the organisation but I see that going down like a fart in a spacesuit.

            You basically have been arguing with people about why they are wrong about this while admitting you dont disagree…

          • “You basically have been arguing with people about why they are wrong about this while admitting you dont disagree”

            I’ve only said it how I see it. Stop making things up.

    • Very interesting to see what happens.

      I’m with TBW, 98% want to stay home but the 2% make the rules.

      Worst case, it’s going to take one business in each sector to transition to WFH in Manila and there rest will HAVE to follow or like every other business that hasn’t transitioned to wage exploitation, offshored or cut corners over the last decade – they go bust.

      Then there’s the issue of sycophant managers unable to stroke their egos online.

  7. I wonder wha WFH ill mean for oil consumption globally? Surely it will be a permanent decrease in demand of a few million BPD??

    How many car sales will be lost? Then there’s the loss of cafes. Melbourne soon to be a CBD as busy as Perth.

  8. Centralisation of workspace was a poor idea in the first place. Transportation time and cost is self-evidently unproductive when congestion occurs. Most systems are currently designed to reduce the waste caused by congestion. WFH is such an easy solution.