Work from home to crunch commercial property

A survey produced by EY and the Urban Land Institute forecasts that the COVID-19 pandemic will have a significant impact on global demand for office space over the next 3-5 years.

Many tenants will require less office space in coming years as they adopt more flexible working arrangements, while many are expected to seek more flexible lease contracts.

Commercial tenants are also tipped to make greater use of co-working facilities.

From The AFR:

Of the 555 respondents surveyed, 96 per cent expected large corporate users to look for a more tailored and flexible office footprint, while 66 per cent expected flexible lease contracts to become the new normal.

More than half (53 per cent) of real estate players expected tenants to reduce their office space as a result of changing work patterns, while a quarter of respondents anticipated their office space requirements would decrease by more than 20 per cent.

Mark Tindale, director at Sydney leasing agency Cadigal, said there had been increasing demand for flexibility from corporate tenants over the past few years but the trend would only accelerate as a result of the pandemic…

According to the report, remote work is expected to grow from 20 per cent of employees being offered 20 per cent remote working time to at least 60 per cent of employees spending more than 40 per cent of their time remotely.

This corresponds to a Fortune survey of American CEOs, which last month revealed that more than three quarters believe they will need less office space in the future due to the work from home (WFH) phenomenon:

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

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.”

Many workers would prefer not to waste time and money commuting to/from the CBD. So why force them?

While CBD businesses will lose, 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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Comments

  1. Iron HorseMEMBER

    Try as it might to ‘force’ workers back into the CBD’s the Property Council will be fighting an uphill battle. If managed properly the savings of WFH are extremely significant to most organisations, therefore what power do they hope to wield (excluding political pressure on Government departments) over private enterprise that is driven by a profit motive?
    Compounding this Governments have been downsizing now for decades so to even forecast a contraction for only ‘a 3 to 5 year period’ is, in my view, extremely bullish. Excepting an unknown event I believe this, in the majority of cases is a paradigm shift and therefore a structural shift. There will most likely be a flight to quality where A and B grade stock will do okay, however on reduced rentals and lower grade stock will sit idle until a new use for it is identified.

    • Spot on. Where I work the CFO is quite excited at the thought of all those savings. I can imagine a State Government Treasurer doing likewise. That said, to maintain/build contacts that support the WFH there will need to be 2 ish days in the office per week. But all the social distancing stuff will not be a fun transition (no more quick lift trip to coffee shop). Relearning social niceities will not be fun either, people will have forgotten some of their manners.

  2. EY are obviously smart people – did they forecast when the next epidemic will hit? It’s worth pondering.

  3. UNITED STATES …

    CORONAVIRUS AND THE OFFICE APOCALYPSE … JOEL KOTKIN … NEW GEOGRAPHY

    https://www.newgeography.com/content/006836-coronavirus-and-office-apocalypse

    What if they reopened the office and nobody came? This scenario is not as far-fetched as many believe. The office may not be dead, but its post-COVID future, particularly in big cities, may look more like a medieval-style arrangement than the buzzing, super dense science fiction vision from The Jetsons.

    In the coming months, particularly after Trump likely loses the White House, there will be a massive campaign—already starting from office owners like Related—to force people back into their cubicles. Billions in real estate are at stake for the creator of New York’s Hudson Yards, which received $6 billion in city subsidies and tax breaks. Besides being a hideous monstrosity, the development now could prove itself a giant white elephant. Wall Street financiers, many of whom have invested in ultra-expensive city residential and office properties, also are desperate to get the peasants back tilling the postindustrial fields. With even the iconic Empire State Building losing money hand over fist, some landlords are so panicked that they are offering tenants free rent to lure them back. Meanwhile, in San Francisco some tech firms are canceling their leases.

    COVID has been especially severe in cities due to what the demographer Wendell Cox labels “exposure density” brought on by insufficiently ventilated places like crowded housing, subways, elevators, and the office environment. The virus’s fatality rate has been between three and six times higher in dense urban areas than in the suburbs or the countryside. No surprise then that among current remote workers—who tend to be clustered in cities where a higher percentage of occupations can be done remotely—roughly 60%, notes Gallup, want to stay at home or close to home. Even fewer still are likely to want to take public transit, which has been widely linked to high infection and fatality rates in the pandemic. … read more via hyperlink above …

  4. Peter Stansfield

    Driving and pushing people to return to the office, as they operated before is likely to generate frustration and resentment from employees. Surely now that they have a taste for the balance of working remotely AND from the office, that companies will see sense and enable both to be the new normal?

    What type of space they’ll use going forward will be interesting. I agree with the previous comments about a flight to more quality space and as the chart suggests (76%) of companies are seriously looking at reducing their office footprint if they haven’t already. Assuming this is being enabled by remote working (or job losses) and/or a rotation system e.g. red team / blue team, which assists with both social distancing and the amount of space required.

    COVID has also had a significant impact on the office sub lease market, where the amount of available space has rocketed especially across NSW, Victoria, South Australia (according to CBRE Sublease Barometer Sept 2020 report).

    We recently set up CONVENiO at http://www.conveniospace.com as a response to these changes. We don’t believe the office is dead, but we do believe how companies and employees will come together in the office will change for many.

    Did you know you can’t currently get a fitted-out office for more than 5 people for just a day? Companies have to be wedded to a long-term lease commitment (even flex spaces require over a month) in order to work from an office and with the amount of empty office space now available it just doesn’t add up.

    CONVENiO is advocating for more space to be made available for short term rentals e.g. 1 day. We plan to focus on the ever-increasing sub-lease market, where 95% of offices are fitted out but sit empty, whilst waiting for a long-term tenant. Ok for the landlord, but a sunk cost for the tenant who no longer needs the space but is trapped in a long-term lease. Let’s use that space for short term leasing and generating revenue for the tenants and help companies who just want short term space for a day or two.

    What do you think?
    We’re brand new, so open to all feedback.